Claims Management Companies

Baroness Sherlock Excerpts

Tuesday 29th May 2012 Lords Chamber

[Baroness Sherlock]

My Lords, I thank my noble friend Lord Kennedy of Southwark for securing this debate. I also congratulate him on his sustained interest in this subject and on pushing it; I am pleased that he has done so. I declare an interest as a non-executive director of the Financial Ombudsman Service.

Like other noble Lords, I have had the experience of being chased by claims management companies. Indeed, it is something which is raised almost every time I have a conversation with anybody in which financial services comes up. Most people express particular irritation about the marketing practices of claims management companies. There cannot be many people left in this country who have yet to have either a phone call or a message promising thousands of pounds for an accident they do not remember having or for a loan they do not remember taking out. However, in some circumstances it can be more than an irritation; these messages can create false hope for people who are struggling financially, at whom they are very often targeted. That is more than an irritation.

Concerns are expressed on all sides about this problem. Consumer groups are worried about the fact that individuals are paying significant sums to claims management companies for getting redress, when they could simply go directly to businesses and, if necessary, use the free ombudsman service. In turn, businesses are complaining that the costs of dealing with CMCs, especially if the claims are speculative or unfounded, are significant and can disrupt their attempts to resolve complaints.

However, there is always a question to be asked as to why claims management companies target a particular market. They do so because an opportunity has arisen. We need to remember that CMCs are flourishing in the financial services industry because of the widespread mis-selling of payment protection insurance by the banks over a long period. That mis-selling created consumer detriment on a significant scale. Provisioning is now up to some £9 billion in the banks. The failure of the banks to maintain the trust of consumers by handling complaints well, on the back of that, has created the opportunity into which claims management companies have stepped.

To give a sense of the scale of the problem, I asked the ombudsman service for some figures. It is now seeing record numbers of PPI complaints; 1,000 new complaints every day. It is finding in favour of consumers three times out of four. Some 60% of all the complaints received by the ombudsman last year were about PPI; more than 150,000 complaints.

In relation to the points made by both of the previous speakers, last year the ombudsman service dismissed more than 5,000 cases because there had not even been a PPI policy sold in the first place. Most of those claims were brought by claims management companies.

I understand that the proportion of cases coming through CMCs has fallen; it is hoped that consumer awareness is improving. But there is more to do. My noble friend Lord Kennedy gave a very good, clear description of the level of breach that is going on, and suggested some remedies. However, the picture is complicated, as he would understand. Some CMCs conduct their business in a perfectly responsible way; no doubt, they obtain redress for consumers who otherwise might not have known that they were owed money or know how to go about claiming it. Consumers should be entitled to make a choice to be represented, provided that they do so with sufficient information and understanding as to what they are getting into and a genuine understanding as to what the alternatives are.

What needs to be done? I offer the Minister three thoughts to take away. First, the Government need to act to encourage businesses and regulators to address the detriment in the first place. That way consumers can be involved in the process of securing redress and take away the opportunity for CMCs in the first place. Secondly, the Government need to focus on delivering effective regulation of CMCs so as to allow responsible CMCs to offer a service but discourage the others out of the market altogether. Effective regulation would need to tackle the kind of marketing practices described by my noble friend Lord Kennedy and the noble Baroness, Lady Scott. But we also need to make it clear that transparency on charging right at the very front of the process and enforcing rules on cold calling were there, so the consumer genuinely understands the costs.

Finally, I very much agree with my noble friend Lord Kennedy that the ideal opportunity has come to put in place an arrangement for dealing with complaints about CMCs by giving effect to the provisions that would pass responsibility to the Legal Services Ombudsman. I will be very interested in the Minister’s response to those points, as the time has come to do something about this problem. I hope that the Government can be encouraged to act now.