Claims management companies (CMCs) have pocketed up to £5bn of consumers’ compensation for mis-sold payment protection insurance (PPI), according to an analysis by Citizens Advice.
The charity accused the 1,000 CMCs that offer PPI claims services of “cashing in on an easy money-making opportunity” created by a combination of the mis-selling in the first place and then a slow and inadequate initial reaction by banks.
Its new report, The cost of redress, highlighted a range of poor practices by CMCs, including a lack of transparency around fees and problems cancelling agreements.
“We estimate that collectively, consumers could have paid CMCs up to £5bn out of the £22bn set aside by the banks for compensation. While CMCs offer a legitimate service for consumers in some circumstances, too many people are paying for a CMC to make a claim on their behalf, even though they could make the claim directly for free.”
Research by Ipsos MORI found that 63% of adults have been contacted by an organisation offering to help them reclaim mis-sold PPI, over half of whom had been contacted more than 10 times in the past year.
Nearly 1 in 3 (28%) of those who have used a CMC said the firm put a lot of pressure on them to pursue the claim and 27% said the fee structure was not clearly explained.
Four in 10 of those who used a CMC were not aware that they could make a claim on their own, and nearly half said they would have done had they known.
Citizens Advice’s evidence also found that some people end up in debt to claims firms despite their claim being successful. If a claimant is already in debt to their bank, the bank can decide to use the PPI compensation money to pay off outstanding debts. The individual then needs to find the money to pay the claim firm, which could be up to £1,000, “and if they’re struggling to repay, may experience harsh debt collection practices”, Citizens Advice said.
Citizens Advice said it wants claims firms and other financial services to be banned from cold calling in order to halt the tide of nuisance calls.
The report said low levels of trust in banks also contributed to the boom in claims firms, with some consumers are put off making a direct claim because banks were the ones who mis-sold to them in the first place.
Citizens Advice chief executive Gillian Guy said: “Consumers have lost out on billions of pounds worth of compensation because banks were too slow to get a grip on the PPI scandal. By banks originally dragging their feet and providing inadequate redress, claims management companies seized an opportunity to take a up to 25% of people’s compensation for admin work that consumers can do themselves for free.
“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.”
Ms Guy argued that trust in banks will never be restored “if they don’t routinely take responsibility for their actions and act quickly, offering genuine redress, if a problem occurs”.
As well as banning cold calling, Citizens Advice said that to clean up CMCs, the Claims Management Regulator needed to make sure that the use of up-front fees is a thing of the past, while contracts for claims management work should be required to specify that the loan the firm is making a claim for so it is clear when firms deserve a share of the compensation.