With regulation of the claims management sector being brought under FCA control from 1st April, Director Nigel Allen explains the potential cost implications for businesses operating under the new system.
For those in the claims management sector, the introduction of Financial Conduct Authority (FCA) regulatory reforms is big news. As well as shaking up the system in England and Wales, the reforms also mark the first time the claims industry has ever been regulated in Scotland, where businesses are used to working in the current, unregulated environment.
One of the biggest changes likely to hit businesses is the cost implications of the FCA reforms, as Nigel Allen, an industry expert with over 25 years of experience in the motor claims sector, explains.
Under the current regulation, all Claims Management Companies (CMCs) have to pay a one-off application fee, which is currently fixed at £2,000, but this is about to change.
“If your company turnover is over £1 million, the application fee will be £10,000 under the new FCA regulations,” Nigel explains.
“That’s a huge increase of 400%, and the fact that this is an upfront cost means that your business’ cash flow is likely to feel the hit.”
Of course, your authorisation to operate as a CMC expires every year, so the change effectively means that, if you turnover £1 million or more, you will need to budget for a £10,000 outlay every new tax year.
“As well as an increase in application fees, the way annual fees for CMCs are calculated is changing under the new regulatory system,” says Nigel.
In England and Wales, CMCs currently regulated by the Ministry of Justice Claims Management Regulator (CMR) pay a 0.9% annual fee on any turnover up to £1 million, 0.8% on turnover between £1 million and £5 million, and 0.75% on any turnover above this.
“Under the new system, CMCs will need to pay a minimum of £1000 on turnover up to £100,000, and then an additional 1.3% on every £1,000 of turnover above that,” Nigel continues.
“This can mean that annual costs mount up very quickly, particularly if your business is used to operating in the Scottish market, where no fees have previously been imposed.”
Cost of Becoming (and Remaining) FCA Compliant
It’s not just an increase in fees that could cause your business to take a financial hit following the FCA takeover.
“Complying to many of the new FCA regulations requires technology and expertise that business’ may have to spend extra to acquire,” explains Nigel.
“For example, the new regulations are much stricter on data storage and retention measures, with extra security required as standard to protect customers. Systems must be in place for disaster recovery and business continuity in order for a business to be compliant. If this is alien to your business, installing this technology is a further outlay to consider.”
In addition, all customer calls must now be recorded, and these recordings stored for at least a year. This means your business needs to have the software to record and store calls long-term.
“Don’t forget to factor in any additional technical expertise your team may require to get to grips with the new software,” advises Nigel. “It’s important your staff fully understand what it means to be compliant, as any stipulations can be subject to an FCA audit at any time.”
While some welcome the introduction of tougher regulation of the claims management sector, for business-owners, particularly those operating in a currently unregulated Scotland, the cost implications of becoming compliant are significant.
“Many smaller businesses are partnering up with more established companies because they can’t justify the operating costs associated with remaining independent.” Nigel says.
Whether that is your solution or not, ensuring that your business has a financial plan that covers all aspects of the FCA regulatory reforms following 1st April is essential.