CLAIMS management companies (CMCs) will have to tell consumers about the free alternatives that are available to them before they sign up when the City watchdog takes over the regulation of such firms next year.

The Financial Conduct Authority (FCA) yesterday published draft rules on how it will regulate the CMCs from next April, when it will also become responsible for overseeing new or established companies in Scotland, where they are currently unregulated.

Measures to transfer the regulation of CMCs to the FCA from the existing Claims Management Regulator were included the Financial Guidance and Claims Act 2018, which also extended regulation to Scotland.

At the same time the Financial Ombudsman Service (FOS) will become responsible for the resolution of any disputes which involve the CMCs.

There have been concerns that customers are not always aware of the level of total charges they will have to pay when making a claim, what the CMC will actually do for them, or how they can make a claim without being charged.

Under the watchdog’s proposals a CMC will have to give customers a short summary document before they agree a contract.

This document will include an illustration or estimate of the total fees, an overview of the services the CMC will provide and the tasks that customers will need to undertake themselves.

The proposals will mean that CMCs will also need to highlight free alternatives, such as the relevant ombudsmen schemes, in marketing material and pre-contract disclosures.

In recent years, some people have used CMCs to claim PPI (payment protection insurance) compensation – and while these firms will take a chunk of any pay-out, free help is also available for making a claim, for example from the FOS as well as from consumer help bodies such as the website, Citizens Advice and consumer magazine Which?

Under the FCA’s planned changes, CMCs would need to highlight the relevant ombudsman or compensation scheme as free sources of help.

A National Audit Office report in 2016 indicated that claims management firms were estimated to have taken between £3.8 billion and £5bn of the £22.2bn of PPI compensation that was paid out between April 2011 and November 2015. Some customers have also used CMCs in relation to personal injuries, as well as claims related to financial services.

The watchdog is also proposing that CMCs will have to record and retain all calls with customers for at least 12 months.

FCA chief executive Andrew Bailey said: “A well functioning claims management sector can help to provide justice and redress to people who have suffered harm.

“But the market doesn’t always work as it should and poor conduct persists across the sector.

“We want CMCs to be trusted providers of high-quality, good-value services that can truly help consumers. A key element of our approach to regulation will be ensuring that consumers are both protected and treated fairly. The proposals we have outlined today are integral to achieving that aim.”

A consultation on the FCA’s proposals for how it plans to regulate CMCs closes on August 3.