Compensation Bill [HL]

My Lords, on behalf of my noble and learned friend Lord Falconer of Thoroton, I beg to move that this Bill be now read a second time. This Bill is part of a much wider set of initiatives that is being taken forward across government. The Government are determined to tackle practices that stop normal activities taking place because people fear litigation, or have become risk-averse. We want to stop people from being encouraged to bring frivolous or speculative claims for compensation. The provisions in this Bill will help us do that. They will reassure people who are concerned about being sued that, if they adopt reasonable standards and procedures, they will not be found liable. The provisions also put in place the legislative framework needed to regulate claims farmers. These are companies whose marketing encourages consumers to make claims, for example in relation to a personal injury. They then either refer the claim to a solicitor for a fee or, in some instances, represent the consumer directly. It is estimated that there are some 400 of these companies operating in England and Wales. Part 1 of the Bill contains a provision on the law of negligence. As many noble Lords will know, in deciding a negligence claim, the court has to consider whether the defendant owed a duty of care to the claimant and, if so, whether the duty of care was breached and whether the claimant suffered loss or injury as a result. In considering the second of these—that is, whether the duty of care was breached—the court has to consider the standard of care and whether the defendant fell short of that standard. The ordinary standard of care in negligence cases is ““reasonable care””, and the question whether the defendant has met that is a question of fact for the court to decide, having regard to all the circumstances of the case. Clause 1 is concerned only with the approach of the court to assessing that question of fact and not with what the standard of care should be, nor whether the defendant owed a duty of care to the claimant. The clause states that one of the factors which the court can take into account in this process is whether a requirement that the defendant should have done a particular thing would prevent or obstruct a desirable activity from occurring or discourage people from providing that activity. This provision reflects guidance given by the higher courts during a considerable period and renewed in recent cases. It will ensure that not only all courts but also litigants and potential litigants are fully aware of this, and will provide reassurance to the many people and organisations, such as those in the voluntary sector, who are concerned about possible litigation. Part 2 sets out a scheme to regulate claims management services. Consumers are frequently exploited by certain claims management companies which do not offer an appropriate level of service. These companies, driven by financial incentives, cannot be allowed to continue misleading consumers. At present, claims management companies operate on a commercial basis. They are not required to comply with rules or a code of practice, and they are not subject to direct regulatory control. Many of the companies in the industry do not operate with appropriate transparency. Consumers are pressurised into signing agreements which they do not understand. The practices which the Government want to curb fall into three main areas: first, encouraging frivolous claims by raising false hopes about the compensation available through aggressive marketing techniques; secondly, misleading consumers about the options for funding their claim—in some cases, not letting them know that a free alternative exists, and in others, selling inappropriate additional services for their own gain, such as loans to fund insurance premiums, without clear advice on their purpose; and thirdly, providing poor-quality advice where claims managers act directly for consumers. Perhaps I can highlight a few examples. Citizens Advice frequently deals with problems created by claims farmers, many of which it mentions in its 2004 report, No Win, No Fee, No Chance. It uses the example of a woman in Berkshire who had an accident involving a trip and suffered cuts and bruises. Three years later, she was offered £500 compensation from the company concerned, but on the advice of a claims management company, she turned it down and was encouraged to borrow money to pursue the claim further. The client eventually won £1,200, but this was deducted from the loan, leaving a shortfall of £950, which was still accruing interest. Clearer information about the risks and the likelihood of additional costs that would be met from her own pocket might have led to a more equitable outcome. Consumers understandably take the ““no win, no fee”” slogan at face value, but they need to be aware of the liabilities they have when they buy insurance and enter into finance agreements to fund their claims. In Denbighshire, a taxi driver was encouraged to claim compensation for the trauma he suffered when he knocked down and killed an 18 year-old man. He was promised up to £15,000 in compensation, but finally received less than £60 in an out-of-court settlement. I must emphasise that the Government firmly believe that if a person has a genuine claim, it should proceed but, clearly, vulnerable people are being targeted and additional safeguards are needed. I want to see a major change in the quality of the service being given and the behaviour of some claims management companies: greater transparency, better quality control and a better service for consumers. Attempts have already been made to self-regulate the industry, but they have not been effective. Many claims management companies have failed to demonstrate the necessary commitment. So the time has come for the Government to take clear and firm action. Part 2 provides a proportionate and responsive framework for regulating the industry. Clause 2 defines claims management services and provides an order-making power to target regulation in specific areas. We anticipate that these areas will include: personal injury; mis-selling of financial products; employment; criminal injuries compensation; and housing disrepair. We also intend to catch the so-called ““rehabilitation farmers”” who have recently appeared. The legislation is flexible: it will allow new areas to be brought in to the regulatory net as problems arise, and it will allow areas to be removed from regulation if problems subside. This approach is consistent with the better regulation agenda that we are pursuing. Clause 3 allows for designation of a front-line body as regulator; creation of a new regulator or, if this is not feasible, direct regulation by the Secretary of State. It also sets out the criteria that need to be met before a body is designated. Our preference is to designate a front-line body as this would provide the most cost-effective and efficient solution and could provide effective regulation quickly to the benefit of consumers. Our prime concern is to safeguard consumer interests. To that end, those who wish to provide claims management services will be required to seek authorisation from the regulator and comply with rules and a code of practice which will govern their conduct. This will ensure that there are appropriate standards of client care, complaints handling, supervision and management. Consumers also need protection when things go wrong. The regulations that will be made under the schedule will create powers to impose a requirement for authorised persons to have professional indemnity insurance and a clear mechanism for dealing with consumer complaints. We also intend for there to be guidelines on the appropriate marketing of claims management services in the rules and codes of practice. We want to see an end to high-pressure selling and to people being approached randomly in the street. The regulations need to be proportionate. The legislation includes a broad definition to ensure that no loopholes exist, but where individuals are already subject to full regulation by another regulator, they do not need to be subject to further control. Clause 4 allows the Secretary of State to exempt members of specified bodies. For example, we intend to exempt members of the Law Society, the General Council of the Bar and the Institute of Legal Executives, where they are already regulated in the provision of claims management services by those bodies, and those who are subject to full regulation by the Financial Services Authority. We have no wish to impose unnecessary burdens on those who provide valuable services on a voluntary basis. Individuals who offer advice voluntarily are specifically excluded from the scope of this legislation, so, for example, individuals who provide advice to friends will not be caught, nor will those who work in a voluntary capacity for advice centres. Our prime concern is to tackle abuse by commercial claims management companies. There are some organisations which are not fully regulated, but which generally provide a high quality of service to consumers. So we also intend to exempt charitable organisations which provide claims advice and other statutory organisations such as ombudsmen. We also intend to exempt trade unions. We may attach conditions to exemptions, including a requirement to have regard to the regulator’s code of practice. This will ensure a level playing field and ensure that everyone who is providing claims management services is meeting the same high quality standards. It is essential that this regulation can be enforced effectively. For those who are authorised, the legislation creates powers for the regulator to investigate breaches of the rules and codes of practice, to require the provision of documents, and to enter and search premises. The regulator will be able also to impose sanctions, including suspension or withdrawal of authorisation. Offences have been created for those who carry on providing claims management services regardless. Clauses 5, 6, and 9 set out the actions that the regulator can take if a person provides claims management services without being authorised. Clause 8 allows the regulator to take steps if he is obstructed in exercising his power to enforce legislation. The regulator will be able to apply for an injunction preventing unauthorised persons continuing to provide claims management services while he is investigating and gathering evidence to proceed with a prosecution. He will also have the power to enter and search. Regulations will include a requirement to obtain a warrant before the enter-and-search powers may be exercised. Anyone found guilty of the offence could face a term of up to two years’ imprisonment or a fine or both. This framework provides flexibility to respond to a changing market. It is proportionate; it closes the regulatory gap; and it provides similar regulatory requirements for claims farmers and solicitors. I am grateful to the Delegated Powers and Regulatory Reform Committee for its important report on this Bill, and I thank it for its detailed consideration. I take the committee’s concerns very seriously, and I will consider the points which it raised in advance of Grand Committee. I commit that I will deal with those concerns properly. We have undertaken targeted consultation of the proposals to regulate claims by management companies and there has been widespread support from key organisations and Members of your Lordships’ House. The remit of the Secretary of State’s consumer panel on legal services reform has been extended to advise on the development of the regulation. That panel was set up earlier this year to ensure our wider reforms of the legal services market are focused on the interests of consumers. It has among its members Which?, Citizens Advice, the National Consumer Council, the Federation of Small Businesses and the Equal Opportunities Commission. We have consulted them on the regulatory proposals and intend to seek their input on the development of the secondary legislation, and implementation, as this is taken forward. Welcoming the Bill, Citizens Advice said:"““We are delighted that the Government has responded to demands to regulate the claims industry. Too often we have seen claims firms targeting people when they are at their lowest, and getting claimants to sign up to loan agreements they don’t understand. Injury victims and others with legitimate claims deserve better than this””." And the Federation of Small Businesses said:"““Many of these companies give the impression that large pots of money in compensation are available for the slightest slip or trip and we welcome this response from Government””." This legislation will put in place vital safeguards for consumers and curb practices that have been allowed to persist for too long. I have said enough about the proposals, and it is now time for your Lordships to consider them. I commend the Bill to the House. Moved, That the Bill be now read a second time.—(Baroness Ashton of Upholland.)