The claim drain

In light of the Financial Ombudsman Service’s annual review, Michael Isaacs examines the dubious practices employed by some claims management companies

The latest annual review from the Financial Ombudsman Service (FOS) into personal finance disputes has ­confirmed what many banks have been experiencing for some time – namely, that a very high ­proportion of claims (26 per cent) now made to the FOS come not from consumers, but through claims ­management companies (CMCs). There is a similar experience in general claims against banks and lenders.

Besides suggesting a further decline into a ‘claims culture’, and yet moving further away from concepts of individual responsibility in financial matters, the FOS statistics are worrying for another reason. The FOS’s ­stated aim is to “settle individual disputes between consumers and businesses ­providing financial services – fairly, ­reasonably, quickly and informally”; and yet the rash of CMC-driven claims through the FOS does not, in many cases, help to achieve this aim.

For one, as the FOS has been at pains to point out, the FOS complaints process is designed for ease of use by consumers. Yet it seems that CMCs, many of which charge fees for up-front reviews or for the vetting of claims (and which sometimes contract with consumers for a share of the return), are the main beneficiaries. The FOS has expressed serious concerns over whether CMCs add much value.

CMCs have been around for many years, but their latest incarnation as a regulated industry has its basis in the Compensation Act 2006. Subject to limited exemptions, CMCs providing regulated claims management services in six sectors (including ­financial products and services) now have to be authorised by the Ministry of Justice (MoJ) and comply with the Conduct of Authorised Persons Rules 2007.

Failing to be authorised is a criminal offence. In addition, firms that carry out ancillary credit business (including debt adjusting and debt counselling) need a license from the Office of Fair Trading (OFT) under Section 21 (1) of the Consumer Credit Act 1974.

The act came on the back of a May 2004 report entitled ‘Better Routes to Redress’ and was aimed at many of the poor claims practices that had previously characterised the industry. Advertising and sales ­practices were particularly poor and consumers were often misled into false expectations of ­compensation. Now, as well as being a breach of the conduct rules, marketing that does not comply with the Committee of Advertising Practice’s codes of practice, or that is misleading to consumers, may breach the requirements of the Consumer ­Protection from Unfair Trading ­Regulations 2008.

Notwithstanding that much of the ­current regulatory regime addresses ­advertising and garnering leads, there remains much abuse. You can still Google adverts promising to write off your credit card debt.

There is also considerable doubt as to just what CMCs are doing for the money they take from consumers. As well as making claims via the FOS that consumers could well undertake themselves, a recent piece in The Guardian (30 May) referred to the fact that “claims management companies are raking in £400m a year for doing nothing more taxing than passing on customer details to solicitors” – a reference to the fact that many CMCs are more akin to the claims farmers of previous years, who ‘help’ ­consumers not by providing any real advice or assisting them in advancing a legitimate claim (one of the purposes of the ‘Better Routes to Redress’ report referred to), but simply by acting as a middleman and selling customers’ details to a panel of lawyers for a fee (and often for all or part of the solicitor’s conditional fee arrangement success fee when the claim is completed).

Indeed, such is the market for these leads that many independent financial advisers (IFAs) who were involved in selling the financial products complained of are ­themselves either selling their clients’ details to a CMC, or in some cases setting up their own CMC to exploit them. Not only must one wonder whether that data is being used with the ­customer’s consent, but it is ­clearly not being used properly in some cases.

The result is that regulators are having to be on their toes to address abuses and to protect consumers. Most recently the MoJ and the OFT issued a joint ‘consumer alert’, warning consumers to think carefully before responding to businesses claiming that they can arrange for outstanding balances under loan, credit card and other consumer ­credit agreements to be written off and secure compensation.

Furthermore, by being ­associated with CMCs that are guilty of ­misleading ­marketing, solicitors can also find themselves culpable. The Solicitors Regulation ­Authority is already looking at 10 law firms concerning false or ­exaggerated claims that debts could be written off.

The reality is that there is a risk of conflict between the financial interest of the CMC in getting a claimant to pursue a claim and the need to spend time getting consent from the customer, investigating the claim, then advancing it properly. Dodgy ­advertising is the route to getting customers interested. After that the drive to turn over claims quickly and get money in often leads to poor claims handling. Many consumers will not receive any (or any effective) ­screening of their claim and may be misled into making claims that have no merit.

When claims are made they are often made on the basis of very little factual ­information, with the CMC trying to put the burden on the lender of uncovering the facts of a potential claim, often by misusing Data Subject Access requests under ­Section 7 of the Data Protection Act 1998. On top of that, the standardisation of claims ­documents means that genuine claims are often lost because there is a drive to squeeze the claim into some existing template for the ease of the CMC, not the claimant.

CMCs tend to focus on what they ­perceive as a quick win. Most recently this has been the perceived loophole in consumer credit agreements entered into before April 2007. However, as the FOS has observed, the ­fixation with these loophole issues is often “masking the real issues that we can tackle” – in other words, the real claim that the consumer may have is being overlooked, or at least inadvertently hidden, by the way in which the claim is being presented.

This last issue prompted the FOS to write to CMCs that are handling ­payment ­protection insurance claims, telling them they need to send all relevant material to the FOS and that “extensive standardised text is unlikely to bear much weight in our ­assessment of the case”.

Consumer confusion

These shortcomings continue to mislead consumers as to their claims, while placing huge burdens on lenders, who are obliged to deal with complaints from customers under Financial Services Authority rules. There is no doubt that CMCs understand this, and indeed may be relying on this huge ­administrative burden to force lenders to settle claims they would otherwise fight. If so, that is equally abusive of the system and the general public will ­ultimately end up paying the price, as lenders have to find the money to pay for the necessary action.

The claims management industry itself seems to recognise that there are those ­within the regulated arena who are giving their industry a bad name. The better among them now seek to distinguish what they are doing by evidencing good ­practices, such as using a vetting process approved by a QC and a contract with consumers and solicitors that mirrors some of the ­requirements under which solicitors ­operate.

However, one cannot help but wonder whether the MoJ, as the claims ­management regulator, will be prompted to take robust action against recalcitrant CMCs. We await a first serious review of authorised CMCs with interest, but ­regrettably without expectation.

Michael Isaacs is a partner at Addleshaw Goddard