Compensation Bill [HL]

moved Amendment No. 26:"Page 1, line 15, leave out ““regulated””" The noble Lord said: We now move to Part 2 of the Bill—and, in particular, Clause 2 and the provision of regulated claims management services. It may be for the convenience of the Committee if we discussed with Amendment No. 26 Amendments Nos. 32, 33 and 70. We rehearsed at Second Reading the background to claims management services in this context. Noble Lords may recall that the history of this lies with the move by the Government virtually to abolish civil legal aid and to set up a structure that has come to be know as ““no win, no fee””, allowing conditional fee agreements to take the place of the previous system of civil legal aid, which was run by the Law Society through local legal aid boards. Of course, a gap was created which was quickly filled by claims management companies. The amendment tackles the problem in the Bill that there appear to be regulated and unregulated services. If one removes the word ““regulated””, as the amendment seeks to do, Clause 2(1) would read:"““A person may not provide . . . claims management services unless—""(a)   he is an authorised person,""(b)   an exempt person””" —and the other provisions set out in the Bill. So what are unregulated claims management services? By implication they must exist, as a result of the presence of the word ““regulated””. The present position is most unsatisfactory. The president of the Chartered Insurance Institute, Mr Peter Hales, earlier this month launched a bitter attack against claims management firms, branding them ““a national disgrace”” and blaming them for,"““the surge in unjust and vexatious complaints against life offices and advisers””." The history of the matter, of course, goes back even further to when claims management firms came into the personal injury arena. The Committee will recall the television advertisement, ““Where there is blame there’s a claim and it won’t cost you a penny””, which was launched on our TV screens. A whole range of advertisements appeared, mainly from organisations which were challenged in the civil courts on the amount of recompense they were seeking. The model that was represented by those claims management companies was found to be faulty. As a result of successful legal challenges, the initial wave of claims management companies such as Claims Direct—I am not referring to New Claims Direct but to the former Claims Direct—and The Accident Group eventually went into liquidation. However, there is a whole range of other claims management companies. This is a serious and urgent problem. The companies and individuals involved will try to avoid regulation wherever possible. In later debates we shall discuss the ways in which they intend to do that. I just give one example for the moment. At Second Reading the Minister said that she intended to exempt trade unions. We shall no doubt debate that at some stage. I have heard of one claims management company which is forming a trade union, having heard that trade unions may be exempted. In drawing up this legislation, we must be wary of allowing any loopholes to exist which undoubtedly would be exploited to the full. My contention in this amendment is that there must be a uniform standard and no gaps in the regulation. A Bill that sets up two regimes does not appear to achieve that. I point out to the Minister that there are two regimes here as the word ““regulated”” means that some people can run claims management services that are unregulated in addition to those running regulated ones. I contend that consumer protection is paramount. The regulatory framework must be robust and must deliver a regulator who has independence, impartiality and integrity. I recall that the Arculus report of the Better Regulation Task Force had as its very first recommendation that claims management companies should first try to move towards self-regulation, but that if by the end of 2005 progress was not made,"““the Department for Constitutional Affairs should step in and regulate the sector””." The report stated at page 20:"““Claims management companies came up as an issue at almost every meeting we held. Everyone called for the Government to regulate the sector””." Many examples were given of how claims management companies had stepped into the gap left by the access to justice reforms. The Arculus report states on page 21 that,"““the Access to Justice reforms shifted the burden of funding personal injury claims from the public to the private sector . . . This change . . . created the conditions for a rapid growth in the claims management sector””." The history is that the,"““sector was characterised by hard-sell advertising and direct-marketing which encouraged people, in effect, to ‘have a go’ . . . Ultimately the whole sector was brought into disrepute””." Further from Arculus at page 21,"““culminated in the demise of market leaders: The Accident Group and Claims Direct””." However, there is a danger that the demise of these companies will lead to the possible emergence of many one-man bands. Therefore we are dealing to some extent with a moving target. That is why it is so important to set out in the Bill exactly what is proposed. That brings me to the points raised by the noble Lord, Lord Goodhart, and I at Second Reading; namely, the 7th report of the Delegated Powers and Regulatory Reform Committee. It had some critical words to say about the Compensation Bill. After setting out the detail, the report concluded that:"““In our opinion it is inappropriate that so many key features are here proposed to be left to delegated legislation””." At Second Reading the noble Baroness said that she intended to fulfil the expectations of the 7th report and to bring forward a series of recommendations. I hope that we shall hear more about those during the course of this and subsequent debates on the various amendments. The advertisements continue. Perhaps I may give a further example of what is happening, and happening so fast that the position keeps changing. I refer to the activities of those who are seeking to absorb into their client list people suffering an endowment shortfall. Under the existing system, the individual has a procedure which can be followed that is completely free of charge. If they feel that they have been mis-sold an endowment policy and as a result will suffer a shortfall in the sum available to repay the mortgage at the key moment, they are entitled to bring forward a claim. Through the FSA and the ombudsman a procedure is in place for such a claim to be dealt with speedily and at no cost at all. Lo and behold, claims management companies have leapt into this arena. I have before me two examples of comparatively recent advertisements from two organisations that make no reference to the fact that a free service is available. I could cite many others. One advertisement states:"““Relax. Getting your endowment back on track is easy””." The advertisement copy states:"““Keypoint Endowment Claims have a proven track record of helping thousands of people receive millions in compensation. One phone call is all it takes to get started, so get in touch today””." Another organisation states:"““Endowment Compensation Assistance [ECA]. If you’ve received notification from your endowment company that there is a high risk your policy will not pay out the target amount you are strongly recommended to take action now. You most likely qualify for compensation. At ECA our dedicated team of specialists know the claims procedure inside out, so don’t delay, act today””." Little boxes cover this advertisement saying ““genuine no win-no fee!””, with a free phone number. On further investigation, it becomes clear that what is widely advertised as a windfall is actually, of course, a shortfall. But by the intervention of claims management companies in this vital arena, every shortfall of necessity now remains a shortfall because the company takes a fee of up to 25 per cent plus VAT that comes out of the compensation which, as we know, comes out of the resources of the policyholders. So the consumer is losing in every possible way. Many people are very concerned about what is happening. As Mr Hales pointed out, it is a national scandal. As the Delegated Powers and Regulatory Reform Committee recommended, there is an urgent need to do something in the Bill. That committee made specific recommendations, pointing out that the regulatory structure was not known; nor was it known who was to be the regulator. The Minister helpfully explained to us at Second Reading:"““We want to be flexible about the regulator . . . and we have commissioned an independent expert to help us with that””." She continued:"““the final decision on what we do will be informed by that expert advice. I am advised that the report will be with me before Christmas, and as soon as I am able to give your Lordships information about that, I will do so””.—[Official Report, 28/11/05; col. 98.]" I hope that the noble Baroness will seize the opportunity of this first debate to give us much more information about what she proposes. The Minister is supported not only by this Committee, but by a range of outside organisations, which see that the time has come for effective, impartial, independent and quick statutory regulation. The Law Society, which regulates the solicitors who handle conditional fee agreements, has welcomed the overall aim of the Bill to introduce regulation to the unregulated claims market and states that it has long been an advocate of the need to regulate claims handlers to protect the public. It refers to the ample evidence over the past few years of abuses in the market and the need to provide consumer protection. The Arculus report pointed out that a number of other attempts were being made to regulate the sector. It referred to the Claims Standards Federation as the governing body of the claims management industry. However, not all the companies joined the federation and there was unwillingness to support it financially. The Claims Standards Council then emerged, which has sought to introduce a range of safeguards for the public, but when it gave evidence to the all-party group it had to confess that it had not been able to persuade the membership to take regulation as seriously as it should be taken, so self-regulation was not possible. In its report on Part 2 of the Bill, the all-party group strongly supported the Government’s move to regulate the sector. It said:"““If the government wants the CSC to be the new regulator it should say so now. We think the better option is to create a new statutory body in the Bill and provide the resources needed for it to succeed””." It continued:"““We need to speed up the timetable for the commencement of the new regime to””—" in the words of a DCA press release—"““‘clamp down on cowboy claims companies’””." So there is a very serious situation and I hope that the Minister will come forward with some clear proposals for the Committee so that immediate action can be taken. However, the regulations envisaged do not address a number of vital consumer protection measures, such as the financial security of regulated companies and individuals, the control of advertising and systems for handling client money. I say that although we have not yet seen the regulations and I can only go on what the Minister has told us about them. If they do not address these vital consumer protection measures, they will be inadequate. The timescale envisaged by the Government causes serious concern, especially in the context of companies making millions out of endowment mis-selling claims when there is a free service available. I hope that the Minister is going to give us chapter and verse on exactly what the Government are going to do. Looking back, this problem arose out of the Government’s wish to move from civil legal aid to conditional fee agreements. In many ways, there has been a lack of action until now, so the Minister has a wonderful opportunity to satisfy the Committee that the Government take this situation seriously and that they are prepared to take immediate action to control this abuse. I have already shared with the Minister ways in which I think the Financial Services Authority could move swiftly to do something about some of the more glaring examples of abuse. I have also shared with her the need to see the Law Society dealing more effectively with abuse by firms of solicitors, in particular in failing to make clear that there is a free service available. I have also shared with the Minister a number of examples of firms where, although they are regulated by the Law Society, there seems to be evidence that they have moved into the endowment mis-selling market and are not making it sufficiently clear to individuals that a free service is available. In conclusion, I am greatly troubled by the way in which a number of companies have moved into this market and are causing further misery to individuals who have already suffered loss or injury and who have a valid claim. However, there are claims management companies that are performing a good service and looking after people to their best of their ability, and I have seen some of them in the run-up to this debate. But from all that I can diagnose, they are in the minority. Sadly, the majority of these companies, some of which are very small and do not have resources, have suddenly found a honey-pot. It was explained to me by an outside observer that it is almost as if they have suddenly discovered an easy way to win the lottery. Millions of pounds of valid short-fall claims are finding a route into the bank accounts of the individuals who are running these companies. That situation cannot be allowed to continue for one moment longer. I hope the Minister will give us reassurance about the action that the Government are now determined to take. I beg to move.