Legal Ombudsman handling complaints about CMCs

The Government has announced that from April 2013, customers of claims management companies will be able to refer complaints about these firms to the Legal Ombudsman. The Government has the power to effect this change under Section 161 of the Legal Services Act 2007.
The Ombudsman can make legally binding orders on companies to pay compensation or offer other redress.

At present, customers of CMCs can submit complaints to the Ministry of Justice. However, this move will give customers added protection and will help the Ministry to focus on improving standards in CMCs and taking wider enforcement action against companies that break its rules.

The Ombudsman is funded by an annual levy from firms that come under its jurisdiction. A spokesman for the  Ombudsman said it will consult with CMCs regarding the level of the proposed levy over the coming months. The Ombudsman also charges a case fee of £400 for the third and subsequent cases it receives from a firm each year.

The Ombudsman can instruct firms to award compensation of up to £30,000, although there are proposals to increase this to £50,000.

The Ombudsman started publishing quarterly complaints data in autumn 2012, and CMCs will be included in this once they come under the Ombudsman’s remit.

Kevin Rousell, head of claims management regulation at the Ministry of Justice, said: “This reform is a win for consumers and provides yet another tool to help stamp out malpractice in the industry.”

Adam Sampson, the chief Legal Ombudsman, also welcomed the news. “This is great news for the public and consumers as we have significant powers of redress to help protect them” said Mr Sampson.

“We are confident we can support the claims management regulator to improve standards across the industry.”

Claims management firms are urged to consider whether their current complaint handling processes are fit for purpose and whether they will be sufficient to limit the potential impact of decisions of the Ombudsman.


MoJ Acts Against CMCs and Additional Regulation to Follow Soon

The Ministry of Justice (MoJ) has taken action against a number of claims management companies (CMCs) in 2012, and companies in this sector can expect an increased regulatory burden in 2013. The MoJ regulates CMCs who practise in areas such as personal injury claims and compensation for mis-sold payment protection insurance (PPI). The claims management sector has seen considerable growth in recent years, and therefore increased scrutiny of companies engaged in these activities must be expected. However, the Government has so far resisted calls for CMCs to be regulated by the new Financial Conduct Authority.

Between April and November 2012, 209 CMCs had their authorisation withdrawn by the MoJ, while three companies were suspended and another 140 issued with warnings. This takes the total number of companies that closed as a result of MoJ action to over 900 in the last five years.

In the same year, 539 CMCs ceased trading voluntarily.

Common areas of concern for the MoJ include companies not being transparent regarding their fees, taking upfront fees when they know there is little or no chance of a successful claim being made, and sending unsolicited marketing messages and texts. In November 2012, the two owners of Tetrus Telecoms were fined £440,000 after the Information Commissioner’s Office (ICO) found that it had sent as many as 840,000 illegal text messages a day regarding re-claiming PPI or claiming for accidents. The ICO is also pursuing legal action against Tetrus for alleged breaches of the Data Protection Act.

Justice Minister Helen Grant said: “We will not tolerate claims management companies that rip off consumers and flout the rules.

“We have introduced a number of new measures in the past year which will mean consumers are much better protected and which offer a route of complaint and compensation while sending a clear message to the minority who break the rules their tactics will not be tolerated.”

Head of the Claims Management Regulation Unit at the MoJ, Kevin Rousell, said: “We will continue to tackle bad practices by claims management companies and take action against those who break the rules.”

In 2013, CMCs can expect to have to draw up a written agreement before taking any fees from their clients. Previously, many CMCs had relied simply on oral disclosure. Consumer complaints about CMCs can also be referred to the Legal Ombudsman from April 2013, which can order companies to pay compensation of up to £30,000.

Chris Lawrenson, head of legal services at the Building Societies Association, welcomed the Legal Ombudsman move, by saying: “The matter is urgent as it is clear that the CMCs operating in the PPI sector are generating by far the most consumer complaints, 74% according the Ministry of Justice.

“Worse still, the vast majority of these complaints are made against just 15-20 firms out of the 1,000 plus authorised in the financial services category.”


Claims companies set to escape ombudsman levy

It seems unlikely, for the time being at least, that claims management companies (CMCs) will be required to pay an annual levy to the body that will handle complaints made against them.

Labour peer Lord Witty proposed an amendment to the Financial Services Bill – the legislation which will fundamentally change financial services regulation in the UK – under which CMCs would have paid an annual fee to their regulator, the Ministry of Justice (MoJ), which would have then paid the sum to the Legal Ombudsman. From April 2013, the Ombudsman will be able to adjudicate on complaints made against CMCs, and will have the power to order them to pay compensation to customers of up to £30,000. However, it seems that the only fees CMCs will need to pay to the Ombudsman will be fees for individual cases.

Lord Witty fears that the cost of the Ombudsman handling CMC complaints will be borne by solicitors, who are required to pay an annual levy.

The Government has said that Lord Witty’s plan cannot be implemented as Government departments such as the MoJ cannot pay levies to the Ombudsman as it would impact on taxpayers. Deputy chief whip Lord Newby denied Lord Witty’s claims that solicitors would bear the cost of CMC complaints, asserting that:“the wider legal profession would benefit because case fee generated by the ombudsman from claims firms would be deducted from the levy they pay. The Government’s position is clear – the wider legal profession should not bear the cost of complaints about that claims sector. The arrangements we put in place will be consistent with that principle.”

At present, financial services firms fund the Financial Ombudsman Service (FOS) via an annual levy, which is payable even if the firm has no cases referred to the FOS that year. Firms in this sector also pay FOS case fees for the third and subsequent cases in any year, although from April 2013 the number of ‘free’ cases firms will be allowed will increase to 25.

A Legal Ombudsman spokesman admitted to some misgivings about the situation, by saying: “If we can’t fund it through a levy then there would have to be another way. We are a bit concerned if it is not going to be funded through a levy and want to know how it will be resolved.”

The plans for the Legal Ombudsman to handle complaints about CMCs were first announced in August 2012. At the time, the Law Society’s chief executive Desmond Hudson welcomed the move, pointing out that 8% of CMCs were stripped of their licences in the 12 months to April 2012. Chris Lawrenson, head of legal services at the Building Societies Association, said back in August: “The matter is urgent”, and went on to point out that 74% of complaints about CMCs concerned those who were involved in payment protection insurance reclaim, and that 15 to 20 firms were responsible for the “vast majority” of the complaints.


OFT warns payday lenders

On November 20, the Office of Fair Trading (OFT) published an interim report on its compliance review of payday lending. The OFT had previously indicated that it would publish the results of the review prior to the end of 2012, however final results will now be available early in 2013.

The interim results are based on:

  • Inspection visits to 50 lenders
  • Reviews of 50 lender websites
  • Reviews of customer complaints
  • A mystery shop of 156 lenders
  • Survey responses from businesses, consumer groups and trade associations

The OFT says in the report that it intends to issue warnings to the majority of the 50 firms inspected. These 50 firms account for the majority of payday loans in the UK. The firms warned will be asked to provide independent audits demonstrating that they have improved their practices, and if they cannot do this to the OFT’s satisfaction, then enforcement action can be expected, with the withdrawal of a Consumer Credit Licence being the ultimate sanction available to the OFT. Formal investigations have already commenced with some lenders regarding aggressive debt collection practices.

In addition to debt collection, the OFT believes the following are areas of concern:

  • the adequacy of affordability checks
  • the proportion of loans that are repaid late
  • the number of loans that are rolled over or re-financed
  • the treatment of borrowers in financial difficulty

The OFT has written to all 240 payday lenders in the UK to highlight its concerns. Payday lender MCO Capital was stripped of its Consumer Credit Licence by the OFT in August 2012.

David Fisher, OFT Director of Consumer Credit, said: “We have uncovered evidence that some payday lenders are acting in ways that are so serious that we have already opened formal investigations against them. It is also clear that, across the sector, lenders need to improve their business practices or risk enforcement action.

Joanna Elson, the chief executive of the Money Advice Trust, who has received 17,000 enquiries in 2012 from customers of payday lenders, said: “Payday lending is an industry that requires close scrutiny. We have a lengthy list of concerns about the practices of many companies in the sector.”

In other signs that the OFT is clamping down on payday lending, law firm Pinsent Mason said that the OFT carried out 68 property searches at the premises of payday lenders in the period January to May 2012, having only carried out one such exercise in the whole of 2011. Property searches can take the form of a comprehensive audit of the firm’s practices, including inspecting documents, monitoring sales calls and online applications and assessing lending decisions.

Most payday lenders are now subject to a new Good Practice Customer Charter. Four trade bodies: the Consumer Finance Association (CFA), the Finance and Leasing Association (FLA), the British Cheque and Credit Association (BCCA) and the Consumer Credit Trade Association (CCTA) introduced the Charter on November 26 2012. Together, these four bodies represent over 90 per cent of the short-term lending sector.

CFA chief executive Russell Hamblin-Boone explained why some people feel they need to take out a payday loan: “Payday exists partly because in 2007-8 banks stopped lending to large groups of people and it can be a more cost-effective way of getting a short-term loan than an unauthorised overdraft or breaching a credit card limit.”


Payday loan interest rates to be ‘capped’

The Government has announced plans to allow the UK’s new financial regulator the power to cap interest rates on payday loans. Many parliamentarians have campaigned vigorously against the rates charged by payday lenders, which can exceed 4,000% APR.

In April 2013, it is expected that the Financial Conduct Authority (FCA) will take over most of the responsibilities for overseeing the conduct of financial services firms that currently lie with the Financial Services Authority. In April 2014, it is anticipated that the FCA will also take on the responsibility of regulating the consumer credit industry from the Office of Fair Trading.

The proposed amendment to the Financial Services Bill – the legislation that will provide for the setting-up of the new FCA – will allow the regulator to intervene on the issue of interest rates if it believes it is appropriate to do so.

Lord Sassoon, a Treasury minister, announced that the Government would be taking this step in late November 2012. Labour’s shadow business minister Lord Mitchell had previously proposed his own amendment to the Bill, which would have provided for an automatic cap on interest rates, with his supporters including Lord Welby, the new Archbishop of Canterbury.

Lord Welby drew a spiritual parallel in making the case for legislation. “The rates are clearly usurious, to use an old fashioned expression. It used to be said in the old days that you couldn’t take away people’s beds and cloaks because they were essential for life. That is the Hebrew scriptures. Today, there are equivalent things being taken away as a result of these very high rates of interest. It’s a moral case which is bad for us, bad for the clients, bad for all of us in this country when it is permitted to happen,” said Lord Welby.

The Government has committed to introducing its amendment provided Lord Mitchell agrees to drop his amendment. It was believed that had Lord Mitchell’s plans been debated in the House of Lords that the Government could have been defeated.

Lord Sassoon said: “We need to ensure that the Financial Conduct Authority grasps the nettle when it comes to payday lending and has specific powers to impose a cap on the cost of credit and ensure that the loan cannot be rolled over indefinitely should it decide, having considered the evidence, that this is the right solution.”

Lord Mitchell described the Government’s move as a “very welcome statement of intent”.

Stella Creasy MP has previously described payday lenders as ‘legal loan sharks’. However, payday lenders have argued that they actually operate on very low profit margins, and that the use of APR – compulsory in all consumer credit advertising – is inappropriate for short-term lending.

Payday lenders are also coming under increased regulatory scrutiny, with their business practices having also attracted adverse comment. Even before the FCA commences regulation of short-term lending in 2014, current consumer credit regulator the Office of Fair Trading has said it intends to issue warnings to the majority of the 50 lenders it inspected in its recent compliance review. Payday lenders who are members of one of four trade associations are now also subject to a new Good Practice Customer Charter.


Information Commissioner takes action on cold calling

The Information Commissioner’s Office (ICO) is cracking down on unsolicited marketing calls, emails and texts. The ICO, which upholds standards of practice concerning information rights and data privacy, has monitored 14 companies. Seven of these could face enforcement action, including household names TalkTalk, British Gas, Scottish Power and Anglian Windows. Three more unnamed companies are still under investigation.

In most industries, companies are allowed to make cold telephone calls, but seeking business face-to-face, i.e. calling door-to-door or stopping passersby; making automated calls; and sending unsolicited texts are all prohibited. The Financial Services Authority also bans cold calls to sell certain types of financial product. However, consumers who receive cold calls have the right to request not to be called again by that company, and organisations must also not make cold calls to anyone who has registered with the Telephone Preference Service (TPS).

The ICO has taken this action based on complaints it has received, and complaints received by the TPS, with the ICO suspecting that some firms are illegally phoning TPS registered consumers. The ICO received 7,095 complaints regarding cold calls in the period 2011-12, an increase of 43% over a 12 month period.

Four claims management companies (CMCs), all specialising in payment protection insurance (PPI), have already been the subject of action by the ICO. CMCs have been cited by the ICO as a problem industry for cold calling, along with home improvement companies, direct marketers and utility providers.

In July 2012, the ICO was granted the power to impose fines of up to £500,000 for breaches of the Privacy and Electronic Communications Regulations regarding cold calling or sending texts and emails. It has a dedicated team of staff who specialise in monitoring this area. In addition to its own powers of enforcement, the ICO can initiate criminal prosecutions of organisations who break the law.

Simon Entwistle, Director of Operations at the ICO, said in October 2012: “The public have told us that they are increasingly concerned about the illegal marketing texts and calls. These are often made by rogue companies claiming to offer pay outs for accidents a person has never had or PPI claims that they are not necessarily entitled to.

“While companies can phone people to sell them the latest product or service, the law states that individuals should not receive unsolicited texts or automated marketing calls unless they have given their permission. We know many companies are failing to do this and two individuals responsible for sending millions of illegal marketing messages are now facing six figure penalties unless they can prove otherwise.”

In November 2012, charity Citizens Advice called for CMCs to be banned from cold calling. Its research suggested 90% of consumers have received calls, emails or texts from CMCs, of which 72% concerned re-claiming PPI.

Citizens Advice chief executive Gillian Guy used some rather stark language regarding the matter by saying “These firms are intimidating people in their home and wasting a lot of people’s time.”


FOS news release on rejected PPI complaints

The head of the Financial Ombudsman Service has suggested that the number of speculative payment protection insurance claims being made is not as large as some people are suggesting.

Writing in the September/October 2012 edition of Ombudsman News, the FOS newsletter, chief ombudsman Natalie Ceeney said: “I’m not seeing anything that suggests that consumers are more likely to make a speculative claim now than in the past.”

Lloyds’ corporate affairs director Matt Young said in early November 2012 that up to 50% of the PPI claims it receives from CMCs are ‘bogus’. However, the FOS has disputed some of the assertions made by high street banks regarding the scale of the issue. It believes that only 2.5% of the PPI cases it receives are ‘frivolous and vexatious’.

In late October 2012, Ms Ceeney told the BBC’s Watchdog that in one quarter of cases where the bank rejects a claim saying that the client did not have PPI, the investigations of the FOS had revealed that such a policy did exist.

It is vitally important that claims management companies monitor their claim and rejection rates to avoid action being taken by the Claims Management Regulator.


OFT increases scrutiny of payday lenders

According to law firm Pinsent Mason, the OFT carried out 68 property searches at the premises of payday lenders in the period January to May 2012, having only carried out one such exercise in the whole of 2011.

Property searches can take the form of a comprehensive audit of the firm’s practices, including inspecting documents, monitoring sales calls and online applications and assessing lending decisions.

Payday lenders lend amounts of up to £1000 for periods of up to one month. Opponents of payday lending argue that very high interest rates are charged, that disclosure of fees and charges is often less than transparent, that these loans can trap borrowers in a ‘debt cycle’ and that funds are sometimes advanced without adequate checking of the applicant’s circumstances.

Payday lenders must be licensed by the OFT, must comply with OFT guidance and must comply with the Consumer Credit Act.

The OFT is conducting a compliance review into the payday lending sector and is expected to report by the end of 2012. The OFT has particular concerns that lenders are offering loans without conducting affordability checks and without fully explaining the risks involved. Misleading advertising, the treatment of borrowers in financial difficulty and loans being ‘rolled over’ into subsequent months have also attracted the attention of the regulator. This review could lead to the OFT tightening its guidance for short-term lenders.

Pinsent Mason partner Ian Roberts made reference to “a few rotten apples who may give the OFT a genuine cause for concern”, but added that he believed the sector provided an important service.  “Licensed payday and other short term lenders play a vital role in the market by providing funds to borrowers who would otherwise be unable to borrow funds from legitimate sources,” commented Mr Roberts.

Following pressure from the Government, four trade bodies: the Consumer Finance Association (CFA), the Finance and Leasing Association (FLA), the British Cheque and Credit Association (BCCA) and the Consumer Credit Trade Association (CCTA) all agreed in July 2012 to improve their standards for payday lending and by 26th of November 2012 at the latest. Together, these four bodies represent over 90 per cent of the short-term lending sector. The agreement has given rise to a new Good Practice Customer Charter, which members of these four bodies will be expected to comply with.

This pressure from the Government is just one of many calls for payday lending to be subject to tighter regulation. After seeing a four-fold rise in the number of people contacting the Citizens’ Advice Bureau (CAB) with debt problems after taking out a payday loan, CAB spokesman Peter Turton said in late 2011:

“The sort of regulatory regime isn’t working to protect people. The government needs to look at consumer credit and get really serious about making it more effective. We need better sorts of messages to firms that it’s not acceptable to treat people badly.”


The Financial Ombudsman Service Question the problem of spurious complaints

The Financial Ombudsman Service (FOS), the independent body that adjudicates on complaints when the customer and the financial institution cannot reach agreement, has suggested that the problem of spurious complaints by claims management companies (CMCs) may not be as large as some reports indicate. In the United Kingdom, there are several hundred CMCs who handle claims of mis-selling of financial products, many of whom concentrate on payment protection insurance (PPI). Anecdotal evidence has suggested that CMCs are bombarding banks and other firms with claims for mis-sold PPI on behalf of customers who have never purchased the product.

Some financial advisers have suggested that they have been charged in excess of £100,000 in case fees by the FOS, in spite of not having any complaints upheld and that in some cases it has driven them out of business. The FOS currently charges the business a case fee of £500 for every case once they have had three complaints against them in a year (although this will shortly rise to 25 cases for smaller businesses) and levies this fee even if the complaint is rejected. Some have called for CMCs to pay a case fee every time the complaint is not upheld.

FOS said that only 5,667 of 222,333 complaints settled, around 2.5 per cent, during the period April 2011 to March 2012, were what it described as ‘vexatious or frivolous’. The 222,333 figure is the number of complaints settled about all financial products, and if just PPI complaints were considered the proportion classed as frivolous may be slightly higher. PPI complaints account for around 60 per cent of complaints to FOS. The FOS spokesperson went on to reveal that in one quarter of the cases where a bank says the individual did not have PPI, this was in fact untrue.

The main reason given for not charging CMCs a case fee is that they would probably pass the costs on to their customers.

The FOS re-iterated its call for tighter regulation of CMCs, which are at present subject to very light regulation by the Ministry of Justice. Some members of the House of Lords want CMCs to be regulated by the new watchdog the Financial Conduct Authority. CMCs contend that they provide vital specialist help to those without the time or confidence to complain themselves. However, some have questioned whether the fees CMCs charge are justified, sometimes retaining around a third of any compensation. FOS statistics suggest it is arguable whether using a CMC makes the consumer’s claim more likely to succeed.

Whatever the rights and wrongs of the debates surrounding PPI and CMCs, it cannot be denied that a great many people have successfully complained about this product. The number of PPI complaints being received by the FOS has exceeded all predictions, with up to 1,500 complaints every day and some 400,000 to date. Despite recruiting additional staff, the FOS is struggling to cope with its PPI workload. According to its 2012 annual report, 14 per cent of cases referred to the FOS take more than 12 months to settle.


MOJ rule changes consultation in particular signed contract to be in place before fees are taken

The Ministry of Justice is consulting on proposals under which claims management companies cannot take fees from customers until a contract has been signed.

The MoJ proposes to amend its rulebook to read:

CSR 11 – A contract between a business and a client must be signed by the client, and the business must not take any payment from the client until the contract is signed.

The business must provide the following information in writing or electronically before a contract is signed…

Research by the British Bankers Association has suggested that in 16% of cases received by banks from CMCs there is no written contract in place.

The MoJ suggests that the proposed change could reduce the number of customer complaints CMCs receive. It has also opined that the cost impact of the proposed change should be minimal, and that business volumes would not reduce as a result.

The proposal is contained in an MoJ Impact Assessment document that also proposes that CMCs should state their regulator as being ‘The Claims Management Regulator’ rather than ‘The Ministry of Justice’; and calls for CMCs who also represent clients to inform their clients of changes in their authorisation status.

Claims management firms should consider whether changes to their charging arrangements will be needed in order to comply with the new provisions which are likely to come into effect.

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