Claims Management Companies

Andy Slaughter Excerpts

Thursday 8th November 2012 Westminster Hall

[Mr Andy Slaughter (Hammersmith) (Lab)]

It is a great pleasure to be here under your chairmanship this afternoon, Sir Alan. It has been an interesting and well informed debate, and I thank the hon. Member for Thurrock (Jackie Doyle-Price) for securing it. We have heard some eloquent speeches on this substantial problem that have called on both professional expertise and personal experience—either directly or through constituents. The hon. Lady was right to concentrate her comments on payment protection insurance because the legal ombudsman brief for this debate says that when it takes over responsibility for dealing with consumer complaints, it expects 95% of them to be related to PPI. I was alarmed to hear that that transfer may be delayed, and I hope the Minister will deal with that and tell us when it will take place.

PPI is not the only area of concern, and I will go on to mention some other worrying aspects of CMCs and their operations. There have been other abuses in the financial services sector, such as endowment mis-selling and bank charges. My hon. Friend the Member for Makerfield (Yvonne Fovargue), who has huge experience in this area and in consumer protection through her role with the Citizens Advice service, alluded to the fact that CMCs have been let in thanks to the appalling performance of the financial services sector in this country over the past few years. If the banks had not mis-sold PPI and overcharged, and if insurance companies had not mis-sold endowment policies, there would have been no opportunities for the CMCs.

In the informative briefing that we had this afternoon, the building societies pointed out that they were responsible for a mere £200 million of mis-selling, whereas the banks have set aside £12 billion for mis-selling one financial product. That fact alone shows the extraordinary depth to which this country’s banking industry has sunk over the past few years. Effectively, the opportunity for CMCs was created by the poor regulation—and, more importantly, by the poor performance—of the financial services sector. Furthermore, the problem was also encouraged by the poor performance of the Ministry of Justice, which has not taken these matters seriously.

At the back of the debate pack are a whole series of questions that I asked in 2011 and earlier this year. In reply to one, the Minister’s predecessor, the hon. Member for Huntingdon (Mr Djanogly), said:

“At the end of July 2011, eight employees and 39 contracted staff work in the Department's claims management regulation unit. Three employees and seven contracted staff handle consumer advice matters, including complaints.”—[Official Report, 5 September 2011; Vol. 532, c. 273W.]

That is not an adequate provision for the degree of mis-selling and abuse that has taken place. That position has now changed, and the Minister will update us on current staffing and operational levels. None the less, those previous levels reflected, at the very least, complacency on the part of all those involved.

Two consultations are under way—only one is still open—on claims management companies. The second one relates to fees, and the Government are quite properly consulting on whether regulation fees should be raised, so that the costs of regulation are better covered by the CMCs, which theoretically make substantial profits. I am also pleased that the legal ombudsman will be taking over responsibility for the matter, and I hope it will do a good job.

We have an interesting brief from the legal ombudsman laying out the various considerations and concerns. The common theme among the concerned parties who lobbied Members before today’s debate is that the Government’s consultation on the regulation of CMCs is not going far enough. It is right, as the August consultation asked, that contracts should be in writing and that CMCs should be required to inform clients of any supervisional variation to the business authorisation once in effect. It is also right that when CMCs refer to their regulatory status, they should say that they are regulated by the Claims Management Regulation unit rather than the Ministry of Justice; many have been suggesting that they have Ministry of Justice endorsement.

Although all those points are welcome, they do not, however, deal with fraudulent claims or the recycling of claims. I should like to see a requirement that claimants must disclose whether they have previously interacted with other law firms or CMCs. More importantly, the whole area of cold-calling, SMS texting and so on, is not dealt with. The main problems that have been raised this afternoon, such as the 25% to 30% that CMCs are raking off from claims—the no-sale claims—have not been addressed. In any other walk of life, it would be extraordinary for a major industry to establish itself on the back of pursuing non-existent claims. In many cases, the parties who receive the texts or respond to the adverts are not fully aware of all the issues. Part of the problem with mis-selling to people who are vulnerable—both in an orthodox and a financial sense—is that they do not have the financial education or skills to deal with the hard sell in the first place, or indeed the hard sell of the CMCs in the second place.

[Jonathan Evans]

Lest it be thought that one is against those people who are unsure whether they have PPI, the Financial Ombudsman Service has made it clear that there is an obligation on all financial services companies to respond to a request to find out whether someone had a PPI contract. Therefore, all those CMCs could easily make that inquiry first before submitting a claim.

[Mr Slaughter]

They could, but they clearly do not. CMCs see a lucrative industry, because there is relatively little cost to them. I am not quite sure what they hope to get out of it in the end, other than perhaps nuisance payments both to make the claim and to make the reference to the financial ombudsman. Given the sharp practice that is clearly involved in the sector, I am not sure whether the Ministry of Justice’s proposals are up to the mark in dealing with it. We have heard some good examples of companies that simply disappear overnight and reappear in another guise. I am not sure whether enforcement is dealt with sufficiently in the current proposals.

[Jackie Doyle-Price]

That goes to the crux of the matter. What we have before us is a tighter system of rules, but the problem is the behaviour of firms which are just going out of their way to profiteer. What does the hon. Gentleman think about the view expressed by some in the industry that responsibility should pass to the Financial Conduct Authority, which will be empowered to tackle firms’ behaviour?

[Mr Slaughter]

I am certainly happy to look at that. It is a constructive proposal that combats the sharp practice and cleverness of such firms on their own level, and that is not happening at the moment. I am afraid that those firms will always be one step ahead of the regulation unit. I hope the legal ombudsman will address that point. We need to look at these companies’ approach to advertisements, text messages and such things. I am somewhat at a loss as to why the Government have been reluctant to tackle this area more cogently. Again, I refer to a question that I asked in February, which is in the debate pack:

“How many claims management companies have had their authorisations revoked as a consequence of telephone or text message spamming since May 2010?”—[Official Report, 27 February 2012; Vol. 541, c. 75W.]

The answer is none, and yet we know that telephone or text message spamming is not only one of the most irritating ways of hooking clients in the first place but one of the most productive; clearly it is productive, or the companies would not use it.

The legal ombudsman makes the point that they should have a significant role to play in unsolicited contacts, whether it is cold-calling or text messaging, but it is not quite clear to me at the moment what that role will be. The legal ombudsman also raises another issue. Once a client is hooked and then effectively milked by the claims management company, how does one deal with enforcement if the company is to be brought to account but simply changes its name and directors, then disappears before appearing under a new guise? I ask the Minister to address those points and consider whether a more comprehensive legislative regime to counter abuses by claims management companies should be introduced.

My right hon. Friend the Member for Blackburn (Mr Straw) has done an extraordinary amount of work in this area and introduced a private Member’s Bill on it. When we were discussing the Legal Aid, Sentencing and Punishment of Offenders Act 2012 last year and earlier this year, both in the main Chamber and in the other place we tabled a comprehensive series of amendments to deal with the type of abuses I have been describing. I understand that the Minister was not in her current role then, but I know she took an interest in the Act. I was at a loss to see why the Government were not happy to adopt—other than that they came from us—what were very stringent restrictions on unsolicited cold-calling and SMS texting, the regulation of claims management companies and other areas to do with data selling. They were primarily restrictions on the abuse of road traffic claims, but they equally apply to the mis-selling of financial products. It does not matter whose legislation it is: again, I advise the Government to go back and look at those restrictions.

There is a myth around that there is a whole industry, including lawyers and other practitioners, that is somehow encouraging the abuses of the system, but nothing could be further from the truth. I should say that I have had representations from the Association of Personal Injury Lawyers, the Bar Council, the Law Society, as well as from major solicitors’ firms dealing with claims on this subject. I urge the Minister, having recently taken on her new role, to listen to the voices in the claimant sector belonging to some of the best informed and most knowledgeable people, who are also very angry about the abuses that take place. Perhaps she should listen to those voices more and listen a little less to the Association of British Insurers and the rest of the insurance industry, whose fingers are all over the claims management industry. Many insurance companies own or co-own claims management companies, and many indulge in practices that are just as suspect in terms of third-party capture, and which manipulate the claimant market in that way. What I hope all Members wish to see is something that protects the consumer and allows genuine and honest claims to be made.

I was grateful to receive the various briefings for today’s debate—except possibly that from the ABI. After a nod towards claims management companies, it suddenly got on to the idea of the compensation culture again. I fear that, in their legislation so far, the Government have been seduced by that argument, despite all the evidence in their own reports and reports by the Better Regulation Task Force, Lord Young of Graffham and Professor Löfstedt. All those reports found that there may be a perception of a “compensation culture” in this country, but there is no reality, and what is needed is the regulation of abuse, not of honest claims.

The Government have pushed forward very enthusiastically in LASPO with a restriction on the ability of claimants with meritorious claims to bring their cases before the courts, across the whole area of civil litigation.

[David Mowat]

I am listening very carefully to what the shadow Minister is saying about compensation culture. To pick one issue, we appear to have a massively bigger incidence of whiplash than other European countries. What is his position on that situation; why does it arise?

[Mr Slaughter]

That is a good point. We have not spent a lot of time discussing whiplash today; I had thought that we might spend a little more. The situation is exactly the same: there is fraud in the area of whiplash claims, particularly soft tissue injury claims. The figures compiled by APIL show that 80% of sufferers of such injuries either report their symptoms accurately or underplay them. That means that 20% are perhaps not reporting their symptoms accurately or are exaggerating them. That puts things into perspective. I do not believe that a massive amount of fraud is going on, but a significant amount is going on and it needs to be tackled.

[Jonathan Evans]

The hon. Gentleman gives the view of APIL, but its briefing also says that 80% of these victims have an accurate medical diagnosis. Yet the all-party group on insurance and financial services, which I chair, heard evidence from doctors saying, “You can’t diagnose whiplash. It’s actually impossible.”

[Mr Slaughter]

Some of us may have qualifications in some areas, but I have to say that I have no medical qualification and I do not know whether the hon. Gentleman has one to add to his other distinguished qualifications. We will not resolve the issue of whiplash this afternoon, but to write off soft tissue injury and say that there is no such thing is taking matters too far the other way.

I will quote one other statistic. As we know, almost 30% of claims are encouraged by insurers. I have one or two examples here from constituents of mine who had minor road traffic accidents, and who then had their details sold on by their insurers. So we have insurance companies that—presumably to make a profit—either own or co-own claims management companies, and that are selling on details and engaging in third-party capture, which of course means they are paying out money without any medical evidence whatsoever.

I am not saying this is a black and white issue. I am saying, “Let us identify who the rogues are, crack down on them and not be distracted by them from our other purposes.”

[David Mowat]

We got into this discussion because of the point the shadow Minister was making about compensation culture. Of course nobody is minimising soft tissue injuries—that would be awful—but we seem to have five times as many of them as other countries in Europe. Surely that statistic should at least have given him pause for thought before he read out the brief from the APIL.

[Mr Slaughter]

As I always do, I read out briefs from everybody, even from the ABI; I have very catholic tastes in the sources I use. Also, I think I said that fraud in relation to road traffic is an area that we need to crack down on. I am always a little suspicious when the ABI and others say, “Well, look how many road accidents and whiplash accidents we are having in the UK,” or, “Look at the concentration of where they are.” One tends to find that there is a higher incidence of road traffic accidents in congested urban areas than in rural areas, and there are more claims management companies in conurbations than in shire counties. That is probably just a truism, but there we are.

[David Mowat]

In terms of the hon. Gentleman’s brief from the personal injury lawyers, Germany also has built-up areas, and we would not necessarily expect the incidence in our country and other countries to be so massively different.

[Mr Slaughter]

I am glad the hon. Gentleman mentions Germany, because one provision in German law is that one cannot make a soft tissue injury claim—a whiplash claim—if one’s vehicle is travelling at below 8 kph. That was the subject of another of the amendments that we tabled to the Legal Aid, Sentencing and Punishment of Offenders Act but the Government chose not to accept.

[Mr Charles Walker in the Chair]

I am not speaking on behalf of, or indeed against, any sectional interests; they are all entitled to make their points, and, on the whole, professional organisations do a very good job in this country. What I am saying, however, is that it is easy to be distracted—often when there is a political agenda on the table—from addressing the real problems and to start addressing what are not the real problems. Where the Government have clearly got things wrong—we could spend until the end of the debate arguing about road traffic claims and probably about PPI claims as well—is in extending the attack on claimants across the board into areas such as employers’ liability and public liability insurance. Some of the changes being introduced in the Enterprise and Regulatory Reform Bill—again, at the behest of insurers and employers—are appalling in the way they balance, or unbalance, power in the legal system in favour of employers and away from employees, turning back the clock, in some cases, more than 100 years. However, I may be going beyond the subject of the debate.

I will not detain hon. Members any further, because there is a reasonable degree of consensus on the problems we need to address. I suspect there is also a reasonable degree of consensus—Government Back Benchers may be slightly less confrontational about the way they express this—about the fact that the MOJ needs to do more to tackle what is a very common problem for all our constituents.

--- Later in debate ---

On resuming—

[Mr Slaughter]

With a short suspension of the sitting and the luxury of having another hour of the debate to go, there is always the temptation to expound more fully some of the points one is making, but I shall resist it, particularly as I am keen to hear what ideas the Minister will put forward, and I know that other hon. Members are too.

There appears to be a consensus among the parties represented here, the media and many respected and trusted organisations such as Which? and Citizens Advice that there is a substantial problem to be dealt with. Some unscrupulous companies—clearly not all or even the majority of CMCs are unscrupulous—take opportunities provided by crises or abuses in sectors such as insurance, financial services or the personal injury market to profiteer. The question for us is how we should deal with that. My contention is that the Government have dragged their feet so far, and that where they have identified targets they have sometimes been the wrong ones. It is not just a matter of regulating the way contracts are drawn up. Many of the companies are sophisticated and will find ways around that, and they often deal, as many hon. Members have said, with vulnerable people who lack sufficient expertise in such things. Which? has made several sensible recommendations, such as the ban on up-front fees. I ask the Minister to go further than that and to examine the whole process that CMCs use to engage consumers, from the initial scatter-gun approaches—the adverts and text messages—through the process of signing up, the contracts, the way people are engaged, the terms and conditions and fees, to the point when redress is sought and the ways people can escape.

I was given an example earlier today—it is an industrial injury claim, but it is just as good—in which, effectively, the CMC that had decided to deal with the claim was negligent in not arranging for issue before the limitation period expired. That might have given rise to a claim against the company for professional negligence, but by the time competent solicitors were engaged to deal with the matter, the company had decided to disappear; it deregistered and was simply not there for a claim to be made against it. That is common, and organisations guilty of one type of abuse will often be guilty of other types, which is why the Minister needs to consider how such companies operate across the piece.

I urge the Minister to look where the real villains are and not, as the Government tend to do at the moment, simply to attack lawyers because they are an easy target, or claimants because substantial lobby groups such as the insurance industry contribute funds to the Conservative party and daily whisper in its ear. She should not make decisions on that basis, but should base them on the real harm and damage that is being done to millions of people.

I have one further example, involving a constituent of mine. Normally I would be happy to name and shame the bank involved, but as I am speaking to the senior partner of its City law firm tomorrow to try to resolve the matter, I shall give it one chance and, if it does not work out, perhaps I will do it next week. My constituent had been mis-sold not just one but serial PPI policies over time, and she made a claim herself rather than using a CMC. She got judgment and enforcement, but on the advice of the bailiffs acting, she perhaps made the mistake of saying that she would go down to the bank’s headquarters in Canary Wharf and seize goods to the value of the claim. She now finds that the bank has started satellite litigation, and Queen’s counsel are employed effectively to intimidate and say, “You can’t take on the big boys and win in that way.”

I end on the point on which I began. If there was more responsibility in the financial sector and less willingness by the Government constantly to attack those who seek to represent through legal aid, through no win, no fee agreements, or simply through the advice sector, which does such a good job in this country, those who genuinely advise people in need—not the dodgy CMCs, but the people all our constituents rely on—we would not be in this mess. This is a triple whammy: there is a problem in the financial services sector with which the Government have not come to terms; there are problems in the advice and legal aid sectors, which the Government have created; and there are problems with CMCs, which the Government are going some way, but not sufficiently, towards resolving.

Although the Minister has time, she might not wish to respond to all my points today. I am sure we will take them up in later debates. As she is coming fresh into the job and is not encumbered by some of the rather foolish statements made by her predecessor, I hope that she will look at the matter openly, in the interests of all our constituents and all those consumers who are faced with the bleak prospect of either not recovering funds to which they are entitled, or being fleeced by organisations that recover the moneys and take 25% to 30%, or simply do not recover them at all.

--- Later in debate ---

[Mrs Grant]

We are working hard with the Information Commissioner, and I am happy to write to my hon. Friend on that point.

At a time when resources are scarce, much has been achieved. Regulatory enforcement action has increased year on year, with 150 audits of CMCs carried out, and 409 CMCs warned, suspended or cancelled over the past year. The CMR unit has also removed the licences of more than 800 CMCs, across sectors, since the start of regulation in 2007, and many others have left the market after the commencement of investigations and enforcement action.

That is where we are at, but where do we go from here? There have been calls over the years to consider transferring the claims management regulation regime to another regulator, but now is not the time for such a fundamental change. We have a big programme of reforms under way, and its central objective is to address CMC bad practices and strengthen the regulatory and complaints regimes to provide better protection for consumers and the public. Our reform agenda includes four main measures.

Following a review of the CMC conduct rules and an informal consultation with key stakeholders, we recently ran a public consultation on proposals to tighten those rules. We intend to issue a response by the end of this year. Most critically, we propose that, first, contract agreements between CMCs and consumers will have to be made in writing before any up-front fees may be taken. That concern was raised by my hon. Friend the Member for Thurrock and others.

Secondly, as highlighted by my hon. Friend the Member for Cardiff North, CMCs will have to refer to being regulated by the claims management regulator rather than the Ministry of Justice. The shadow Minister welcomed that proposal.

Thirdly, CMCs will have to inform their contracted client of any variation in or suspension of their authorisation; and, finally, CMCs that operate websites will be required to publish their terms and conditions online as standard, including examples of how their various costs are calculated in a specific format.

On the delay to the rules review consultation, which was raised by my hon. Friend the Member for Thurrock, I can confirm that the consultation was launched as soon as possible after internal clearance of the intention to consult and the release of the initial impact assessment.

Last year, we also ran a public consultation on imposing a ban on CMCs offering financial rewards or similar benefits as an inducement to make a claim. That proposal was made in response to the recommendation contained in Lord Young’s report “Common Sense, Common Safety”. The ban will come into effect along with other amendments to the conduct rules from April 2013.

From next year, we intend to commence powers under the Legal Services Act 2007 to extend the legal ombudsman’s jurisdiction to provide an independent complaints and redress scheme for clients who are dissatisfied with the service provided by CMCs that they have contacted. Consumers will benefit because the legal ombudsman has wider powers of redress, including the ability to award compensation.

Lastly, we are implementing the primary recommendations contained in Lord Justice Jackson’s “Review of Civil Litigation Costs,” including in particular a fundamental reform of no win, no fee conditional-fee agreements and a ban on the payment and receipt of referral fees in personal injury cases.

[Mr Slaughter]

How will restricting the ability of claimants to obtain proper legal representation restrict the operation of CMCs that either make unmeritorious claims or make meritorious claims incompetently?

[Mrs Grant]

We are not restricting access to justice in any way. That is another argument I have had with the hon. Gentleman in other debates over the past year and a half. Access to justice will still be possible and meritorious claims will continue to be made.

I have sought to cover a lot of ground in a relatively short space of time, and I have talked through improvements in the way the CMR unit does its day-to-day job and its work in preparation for next year’s reforms. We remain focused on delivering a successful and strong regulatory regime. To give consumers and defendants more confidence in the system, it is important that CMCs ensure that they comply with the rules.

I reassure all hon. Members here today that there will be no let up in the CMR unit’s compliance and enforcement work, and it will do what is essential to strengthen the regulatory and complaints regimes to provide better protection for consumers and the public.