By Huw Jones
LONDON (Reuters) - Britain's financial watchdog has proposed changes to stop individuals from failed firms profiting from their own poor conduct by setting up a claims management company, a practice known as "phoenixing".
Claims management companies (CMCs) help consumers file complaints with the Financial Services Compensation Scheme (FSCS) and take a slice of any cash awarded.
The Financial Conduct Authority said that in one example of phoenixing it took action against the head of a financial advice firm that had provided inadequate service to consumers.
After the person was barred from acting as a company director his wife set up a CMC, which claimed more than 5 million pounds from the FSCS against her husband's former financial advice firm.
The watchdog is proposing to ban a CMC from managing FSCS claims if a person connected to the CMC is or was linked to the financial services activity that is the subject of the claim.
Consumers don't need to use a CMC to complain to the FSCS, but many do so for the convenience.
The FCA said an estimated 1,319 claims over six year to the FSCS involved phoenixing, with a total of 3.7 million pounds paid out per year. The claims cost consumers on average 11,000 pounds per claim in CMC fees and other costs.
PIMFA, a trade association for the investment and financial advice industry, said the proposed ban would stop the transfer of risk onto the FSCS, and in the longer term help to lower the fees the FSCS charges on the financial industry to pay compensation on claims.
In January the FCA consulted on a proposed a price cap on CMC fees.