The move marks the latest step in the government’s work to create a financial sector that serves customers and supports British businesses.
Tough new rules are being introduced as the part of a package of ongoing work by the government to crack down on the rogue firms responsible for bombarding the public with misleading advertising and flooding banks with unsubstantiated claims for compensation – at a cost to other customers.
To ensure that the claims management industry delivers the best possible results for consumers, the Claims Management Regulation Unit at the Ministry of Justice will also be expanded with more enforcement staff, funded by an uplift in fees paid by regulated claims firms, and a new set of toughened conduct rules will be unveiled this week to bear down on abuses by companies.
Government action has already seen the number of claims firms operating drop by more than 1,000 since a peak of 3,400 in 2011 to 2,300 now.
The fines will be used to make sure that those which remain in the industry follow the rules – and that they pay for it when they do not.
Shailesh Vara, justice minister, said: “We will not tolerate companies which waste hardworking people’s time and money through their own laziness, incompetence or frankly dubious practices.
“We are already making sure rogue companies are shut down – and now we are ensuring those who are wasting everyone’s time will pay for it.”
Sajid Javid, financial secretary to the Treasury, added: “These new rules will put PPI claims pests in their place.
“Cold call companies that bother the public will now have one less reason to do so.
“This will also help free up the banks to pay legitimate claims more quickly.”
The fines will be brought in as part of law changes being made through the Financial Services (Banking Reform) Bill which is currently progressing through Parliament.
They are expected to take effect next year, when further details on the maximum fine levels will be published.
More than 1,100 claims companies specialise in helping people make claims for compensation for mis-sold financial products (like Payment Protection Insurance).
Banks have complained that some firms are responsible for deluging them with inaccurate and incomplete claims which have caused unnecessary costs and major delays in resolving genuine claims.
The new rules being published by the CMR unit this week include giving claims companies a duty to make sure the claims they are submitting have a realistic chance of success, as well as ensuring full evidence is provided to back up any allegations.
Firms will also have to carry out thorough audits of how data they use has been gathered, so they can no longer turn a blind eye to whether leads have been found by illegal marketing texts and calls.
Kevin Rousell, head of the Claims Management Regulation unit, said: “It is our absolute priority to protect customers and we are making certain that firms are following the rules.
“We do not tolerate bad practice and continue to take action against companies which break the rules, including removing their licence to trade. Issuing fines will be an important new weapon for us.”
As well as employing more staff to tackle irresponsible practice by claims firms, the government will strengthen the CMR Unit by appointing independent regulatory experts in non-executive roles and will commission a comprehensive review of the independence of the current Claims Management Regulator’s governance arrangements.