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.”