Claims management companies (CMCs) play an increasingly significant role in the financial services sector.
Recognising certain issues, the FCA has been working to try to mitigate the risks such companies pose to businesses. Yet, in January 2023, FTAdviser reported that the regulator still had a number of “residual concerns”, including:
- Issues around advertisements
- Inappropriate sourcing of customers
- Poor attitudes to regulatory obligations
- Failure to properly investigate the veracity of claims.
And not even the largest firms are safe.
Indeed, the UK’s biggest advice firm, St. James’s Place, received a barrage of complaints during the first half of 2023. A number of CMCs are actively promoting their services on Google and through social media, offering their services to help people make a claim for redress or compensation against the firm.
No matter how big or small your financial advice firm is, you shouldn’t be complacent about the effect a CMC could have. So, read on to find out five ways CMCs could impact your business.
1. A CMC claim can cause huge disruption
Receiving a complaint, even a groundless one, is likely to cause significant stress and consume a huge amount of time and resources.
While handling complaints can be extremely stressful to you as a business owner, it’s crucial to remember that it affects your employees too, and could hamper their morale and productivity.
Consequently, any complaint will divert attention away from normal business activity and will almost certainly have a negative knock-on effect to your usual day-to-day operations.
2. Damage your brand and business reputation
If word gets out that you have received a complaint, this has the potential to tarnish your business reputation.
Unfortunately, unsatisfied clients are likely to share their negative experiences with others, potentially deterring new clients. And the internet has the ability to spread bad news far and wide, causing difficulties when it comes to protecting your online presence.
Even if the complaint is groundless, or resolved without a fight, negative publicity can make it harder to market your business effectively.
Following a significant complaint, rebuilding trust in your brand can be challenging, requiring substantial marketing and PR efforts, which can be costly.
3. Increase the cost of your PI insurance
Professional Indemnity (PI) insurance doesn’t come cheap, and as the risks of claims increase, so do the premiums you have to pay for protection.
A report from Citywire revealed that although the average cost for PI insurance dropped in 2021, in 2022, it increased by 2.7% of advisers’ regulated revenue – and the smaller the firm, the bigger the effect. According to data, “firms earning less than £100,000 a year, premiums make up a hefty 6.2% of regulated revenue”.
This is exacerbated by an increase in pension transfer claims seen in recent years. And insurance may be harder to secure, too. Some providers now also refuse to renew IFA cover due to the risk of claims and associated high costs.
4. Delay or derail the sale of your business
A complaint, legitimate or otherwise, has the power to delay or even entirely derail the sale of your business. It could negatively affect:
- Due diligence – investigating the complaint, ensuring compliance, and rectifying any issues is likely to extend the due diligence timeline and delay or terminate the sale
- The value of your business – a prospective buyer will probably use the opportunity to negotiate a lower price to compensate for the perceived risk or demand additional safeguards or financial guarantees.
If you receive a complaint from a CMC when you’re thinking about selling your business or when in the middle of doing so, get in touch and we’ll do our best to help you resolve the problem quickly.
5. Force you to close your business
In the worst case scenario, a complaint could cost you your business. A combination of all the factors discussed above could become insurmountable and fighting your cause may end up with you losing everything.
As such, complaints shouldn’t be ignored, or dismissed out of hand. It’s easy to stick your head in the sand and hope problems will go away, but they won’t.
The good news is that when it comes to complaints, we’re here to help and support you to reach the best possible outcome.
Get in touch
To find out how you could protect your business from the threat posed by CMCs or for help in resolving a complaint you’ve received, talk to one of our experts.