National advice charity Citizens Advice (CitA), together with its sister body Citizens Advice Scotland, published a report in March 2014 entitled ‘The cost of redress’, in which it criticised the lack of transparency exhibited by some claims management companies (CMCs) towards their customers regarding claims for mis-sold payment protection insurance (PPI).
28% of the CMC customers surveyed say that they were pressurised into making a claim. 27% thought that the fee structure had not been sufficiently explained.
39% said they were unaware that they could have made their claim directly to the company that sold the policy, and 51% did not know that free sources of help with making a claim were available. 47% said that if they had known about these free sources of help, then they would not have used a CMC. The report says some customers believed that using a CMC would improve their chances of success, could increase the level of their payout and could result in the compensation being paid faster.
Other issues of concern were highlighted. One extreme case was cited of a customer who paid more in fees to the CMC than she received in compensation. Mention was also made of the fact that some people end up in debt to their CMC. If a customer with a successful PPI claim has debt arrears with the same lender, then the financial institution can decide to use the compensation amount to reduce the arrears, and the customer never sees the money. However, in these circumstances the CMC still wants its fee, so some people in this situation have been forced to take out new loans in order to pay their CMC.
The report estimates that CMCs have taken up to £5 billion worth of customers’ PPI compensation in fees, based on the fact that financial institutions have set aside £22 billion to pay PPI compensation claims, and based on the typical share of a customer’s compensation that a CMC takes. The report suggested that: “Given the amount of work that CMCs carry out on a typical PPI complaint, the fees seem hugely disproportionate.” It went on to say: “By and large they have been cashing in on an easy money-making opportunity.”
Following on from the report, CitA has made a number of recommendations for regulatory changes to the claims industry, which include:
- A ban on cold calling
- A ban on taking upfront fees
- Contracts with customers to explicitly set out which policies are covered by the terms of the claim
CitA Chief Executive Gillian Guy commented on the report’s findings by saying: “Some claims management companies operate well below the standards that are expected and sometimes outside of the rules. The regulator needs to quickly revoke the licences of firms that are not up to scratch.” CitA Scotland Chief Executive Margaret Lynch added: “This research lifts the lid on PPI compensation companies’ false promises – and shows they are too good to be true.”
The issues regarding putting pressure on customers to make a claim, making false claims about the customer’s prospects of success and not explaining fees properly would certainly be of interest to the Claims Management Regulator at the Ministry of Justice (MoJ). Over 200 CMCs lost their authorisation to trade as a result of MoJ action in 2013, representing almost 10% of the number of CMCs trading today, so it is vitally important that companies ensure they are following the rules.