Blog: Whiplash reforms were supposed to be about fraud

whiplash-2016

  • The government’s reforms will do nothing to reduce fraud and may actually increase it
  • The transfer of regulatory authority from the MoJ to the FCA will loosen the regulatory grip
  • Fraud could be displaced into new areas

There is something rather strange happening in the debate around the whiplash reforms. For all the sound and fury across the entrenched battle lines with which we are all familiar, there does appear to be a consensus forming across the divide.

It may not be enough to change the outcome in anything but modest ways. I doubt whether this rare display of accord will become obvious in the opening skirmish of the Prisons and Courts Bill this week in the House of Commons, even though it is supposedly one of the justifications for the proposed programme of reforms. This area of consensus should have always been the primary target of any reform package, with all other objectives being secondary. That it hasn’t been the principal driving force will come back to haunt all of us in the coming years.

We are all intimately familiar with it and the insurance sector spends millions of pounds, probably every week, to combat it. Yet, somewhere along the line we have allowed it to be relegated in importance. Not forgotten, but not at the forefront of our collective thinking either. I am of course talking about combating fraud.

I have no intention of whispering it. In fact, I’ll do my very best to shout it at every opportunity. There appears to be a growing consensus that the government’s reforms will do nothing to reduce fraud and may actually increase it.

To be clear, I’m not saying that insurers have spectacularly u-turned and are now opposed to the reforms. The prospect of effectively removing lawyers from the process of low value claims, however legitimate, still has too many attractions unfortunately for insurers. Whatever else the whiplash reforms will eventually achieve, and there are lots of known unknowns out there, an acknowledgement that the reforms will not tackle fraud is deeply troubling.

First, it is generally felt that claims management companies, with a lower cost base and fewer regulatory burdens, will be able to make the numbers work and will likely flourish in the new claims market. They will fill the hole left by solicitors as they exit the market to, in the words of the Ministry of Justice, “find alternative economic activities”.

Far from tightening the regulatory environment, I’ve heard it suggested that the transfer of regulatory authority from the MoJ to the Financial Conduct Authority will loosen the regulatory grip. The significantly higher fees charged by the FCA will simply be too high for CMCs and will drive them underground. Comprehensive reform of the CMC market will certainly not happen at the same time as the whiplash reforms are implemented, in October 2018.

Second, the Insurance Fraud Taskforce has yet to make significant progress on its recommendations because of a lack of a formal ‘legacy vehicle’ to drive and police them. The government is leaving it to the industry to pursue, but given that some 19 of the recommendations require some action from a government department or regulator, it really needs government backing to drive through progress.

Third, there is widespread concern that current areas of fraud will be displaced into new areas. Part II of the reforms may cover credit hire and rehabilitation, but it’s certainly not clear that any resulting action will be in place by late 2018.

I’ve now heard these concerns both publicly and privately by several senior insurance executives, including at CEO level. I find it staggering that the insurance sector is happy to accept such ineptitude from the government - despite all the known potential negative consequences for genuine premium-paying customers, support for the reforms among insurers remains high. How have we allowed this to happen?

By permitting the government to massively disrupt the market and yet not tackle the fundamental problem of fraud, we are badly letting down our customers - and ourselves.

Click here for the first instalment of this short 3-part series on whiplash reform, and here for the last blog all about CMCs.

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