Birmingham law firm Blakemores has welcomed the introduction of regulation of the claims management sector.

Under new rules, any companies or individuals carrying out regulated claims management services after next April without prior authorisation will be guilty of committing an offence and will be liable to a fine and/or imprisonment of up to two years.

Following its consultation, Better Routes to Redress, the Government accepted that the so called compensation culture is a myth, but a damaging myth nonetheless. The Better Regulation Task Force found that the activities of claims management companies had contributed to the "have a go" culture that appears to exist in modern British society. Under the Compensation Act 2006, which received Royal Assent on July 25, claims management companies (CMCs) will be subject to strict statutory regulation and will require authorisation to provide regulated claims management services.

Rachael Palmer, head of the injury and insurance claims department at Blakemores, said: "The activities of some CMCs have had a damaging effect upon all of those involved in the claims process.

"However more importantly the hard sell tactics and misrepresentations used by unscrupulous CMCs to gain business have significantly undermined the public's confidence and ultimately are likely to have deterred people from pursuing genuine claims. In placing CMCs under strict regulation, they will be forced to deal with their clients honestly."

Under the Act, persons or companies may not provide regulated claims management services unless they have authorisation to do so or they fall within one of the exemptions under the Act.

Regulated claims management services are defined as "advice or other services in relation to the making of a claim" and will cover a variety of activities including the provision of financial services, referring or introducing one person to another – for example, referring a claim to a solicitor – and making enquiries in relation to a claim.

Individuals who offer regulated claims management services otherwise than in the course of a business, such as solicitors, barristers, legal executives and independent trade unions, will be exempt from the authorisation requirements. The Department for Constitutional Affairs is currently carrying out a consultation on the issue of exemption ahead of November when the applications process for authorisation opens.

Initially the Secretary of State will be the regulator supported by a senior civil servant (the head of regulation) and Staffordshire Trading Standards Council will process applications, investigate any suspected evasions and monitor compliance with the rules. Ms Palmer said: "The introduction of the regulatory regime represents a fantastic opportunity for all those involved in the claims process to work together to improve consumer confidence by ensuring that the public receives the highest level of assistance possible, while at the same time demonstrating that any 'underhand' activities and fraudulent claims will not be accepted.

"It also represents an opportunity for CMCs to rid themselves of the negative image that they have been tarnished with by the much publicised activities of the other less honest ones."

The regulatory regime does not stop once authorisation to carry out claims management services has been granted.

Thereafter, anyone involved in claims management services will be subject to strict rules of conduct, which cover a number of areas of the business including advertising and sales, arranging insurance, handling client money and handling complaints.

Ms Palmer warned: "The deadline for submitting initial applications for authorisation is February and any companies carrying out claims management services who have not sought authorisation to do so will be subject to strict penalties, including imprisonment, when the Act comes into force in April."

Ben Elsom, Blakemores business development manager, said: "There appears to be little recognition within claims management companies of the impending regulations and what measures they need to take to become authorised. We believe unless CMCs take immediate steps to prepare themselves for regulation, the regulator will be left with little option other than to refuse them authorisation."