Claims management ‘phoenixing’ occurs when individuals from financial services firms go out of business, but later reappear in connection with a CMC and charge consumers for seeking compensation against their former firm’s poor conduct.

Phoenixing generally requires the existence of a compensation scheme – normally the Financial Services Compensation Scheme (FSCS) – which will pay claims relating to the activities of financial services firms that have wound up and potentially owe compensation to consumers.

The regulator has taken action where it has been possible to do so to prevent this practice. In one case the managing director of a financial advice firm provided inadequate service to consumers. After the managing director was barred from acting as a company director, his wife set up a CMC.

The CMC represented customers claiming more than £5m from the FSCS in claims against the husband’s former financial advice firm. The FCA refused the authorisation of the CMC as the firm did not meet its standards.

While the FCA was able to stop phoenixing by refusing authorisation in this case, the new rules being proposed will put a stop to claims management phoenixing across the market. The regulator has opened a consultation on its plans, running from today until 21 June 2021.

Sheldon Mills, executive director of consumers and competition at the FCA, said: “Consumers should be able to choose to use a CMC to help them claim compensation from the FSCS. But paying someone to provide help who is connected with the firm that caused the consumer’s loss is wrong, particularly where the firm had a responsibility before winding up to help its customers to obtain compensation.

“Our proposals are designed to put an end to this practice and to increase consumer trust and confidence in financial services firms, CMCs and the redress system.”

The FCA says that by stopping CMCs from managing FSCS claims with which they have a relevant connection, the FCA will ensure CMCs are not seeking to profit from past misconduct of individuals connected with the CMC.

The regulator says it wants to ensure that firms have customers’ best interests at heart and are not incentivised to treat customers poorly, that they will take due care in the provision of financial products and services and, when things go wrong, will take responsibility and put things right for their customers.

CMCs exist to help customers make claims for compensation when they have suffered loss or damage. In the financial services industry these claims relate to losses caused by financial services firms. The FCA became responsible for the regulation of claims management companies in April 2019.

Keith Richards, CEO of the Personal Finance Society, said: “Last year I received 40 complaints about the conduct of claims management companies in less than a week when we highlighted our concerns and shared this evidence with the regulator.

“The FCA is right to be concerned about individuals connected with a wound-up financial services firm reappearing in connection with a claims management company. Individuals should not be able to financially benefit from their own past conduct, which caused consumers to be out of pocket.

“It is appalling that of the 250 claims management companies the FCA regulates with permission to manage financial services claims, at least 18 are linked with businesses that could allow individuals to benefit from their past firms’ poor conduct.

“The cost of poor practices at a minority of claims management companies impacts public trust and pushes up the cost of financial advice. Phoenixing must stop. I respect that professional CMC’s have a key role to play but poor and unethical practice needs stamping out.”