Expertise from A-Z - Personal injury reform: Shaking up the compensation culture

Three years ago as an industry, we were welcoming the government’s reforms to the civil litigation system. This was heralded by the incoming Legal Aid, Sentencing and Punishment of Offenders Act 2012 and Lord Justice Jackson’s other Civil Procedure Rules recommendations to address the UK’s infamous compensation culture when it came to speculative personal injury claims. Three years on and it is clear that the reforms have not addressed the underlying problems with the UK compensation system, as the volume of whiplash claims within the portal have returned to pre-Laspo levels.

Compensation industry
Compensation culture? Arguably more of a compensation industry. Despite the intentions of the Act’s reforms, the claims process still allows excessive profits to be achieved through effectively trading claims and claimants by harassing individuals to make a claim following an accident. The negative impact on society and individuals from the aggressive tactics deployed by some of these claims management companies have been well versed by the industry. National newspapers such as The Times recently cited that 12 million people answer an unwanted phone call every day – that’s one in five of us. There are also in the region of 5000 complaints a month to the Information Commissioner’s Office regarding such cold calling by CMCs. Given this scale, it is not that surprising to see that CMC turnover has increased 2013/14 to 2014/15 from £238m to £310m on the back of increasing claims numbers.

Undoubtedly, the market has developed Laspo-compliant models that enable some dubious CMCs to operate profitability within the confines of the new legislation, while promoting fraud. And, according to the Institute and Faculty of Actuaries, where there are a large number of CMCs, there is a correspondingly high proportion of third party personal injury claims being filed – many of which are spurious.

While it is clearly not right to suggest all CMCs engage in dubious practices, there are too many damaging the reputation of the entire personal injury claims process. In order to protect the general public from the constant and intrusive bombardment of nuisance calls and messages, and restore public confidence in our civil justice system, we need to clamp down on these practices.

All of this has been echoed by the recent independent review of claims management regulation led by Carol Brady, which found a ‘widely held perception’ of ‘widespread misconduct’ by CMCs and is also supported by the Insurance Fraud Taskforce’s evidence on nuisance calls.

Regulatory change
The Chancellor of the Exchequer George Osborne’s announcement in the March budget of a tougher regulatory regime – including a shift to Financial Conduct Authority regulation – comes as good news. The statement’s commitment will go some way to helping reduce bad practice through a few different aspects.

As an established regulator, the FCA has the expertise across a wide range of sectors to support the change. It also clearly demonstrates a step change with the intention to put the sector on a secure, long-term footing which focuses on delivering good outcomes for consumers and lets the Ministry of Justice concentrate on its core objectives.

The shake-up will also see CMCs have to seek reauthorisation under a new, more robust process. This should act as a barrier to unscrupulous firms. However, authorisation alone will not stamp out the ease of ‘phoenixing’: directors of a liquidated firm taking over another, without regulatory approval. Therefore, the introduction of a fit and proper test and increased personal accountability for rule breaches comes as a welcomed move.

Further recommendations to control some unwanted practices are: a cap on the fees CMCs can charge claimants; making it mandatory for CMCs to show their phone numbers when calling; and a ban on automated voicemail calls.

However, the transfer of regulatory powers and implementation of the above recommendations will only be a successful deterrent if there is rigorous and robust regulation and enforcement. To achieve this, the FCA needs adequate funding and the resources to deliver tangible change and respond quickly.