Claims Management Companies

Kate Green Excerpts

Tuesday 19th March 2013 Commons Chamber

[Nic Dakin]

The hon. Lady makes an excellent point. We have a situation in which claims management companies can never lose, however vexatious the claims they pursue, while businesses targeted by those companies always lose. She is right: it is time to balance the risk in a different way.

[Kate Green (Stretford and Urmston) (Lab)]

I am glad that my hon. Friend has initiated this debate. Does he agree that some of the Government’s policies that will mean people are no longer able to access lawyers—the fast-track small claims procedure, for example—will mean that claims management companies are able to expand their businesses? People will not be able to go it alone, but neither will they be able to access proper legal advice?

[Nic Dakin]

My hon. Friend draws attention to a very real danger in the current changes.

In his letter to me, Mr Broadbent drew attention to the following unsatisfactory way in which the FOS acted. After downloading the FOS standard PPI claim form, a client completed it. He answered the questions honestly in the form of tick boxes, and stated that he did not recall the sale process. The claim was declined, yet nine months later a CMC made the same complaint on behalf of the same client. In this case all the boxes were ticked, stating that the client had a clear recollection of the sales process and how the product was mis-sold. That was not considered a vexatious complaint and it is being considered by the FOS. It says that it must ignore the original complaint and review it on the basis of the claim submitted by the CMC. That will not strike anyone as a sensible, fair or efficient way to proceed.

The FOS does good work resolving disputes in many areas, but its ability to deal appropriately with PPI disputes is compromised by the sheer volume of complaints it receives. Last year, complaints about PPI made up 60% of all complaints dealt with by the FOS, yet CMCs made no contribution to the running costs of the FOS. Greater control over CMCs, and a system where they will be charged for making unsuccessful claims, would help free up the FOS to deal more effectively with other matters in its inbox.

The Ministry of Justice is to be applauded for making some headway in its control of CMCs, but there is more to do. The ban on referrals in personal injury cases, which is due to come into force in April, will hopefully reduce harassment of members of the public who have been involved in accidents. The flipside of that is that claims management companies may focus more on PPI claims and look to diversify into new areas of vexatious claiming. Indeed, there is already some evidence that they are turning their attention to mortgages.

The Financial Services Authority acknowledges that there has been no wholesale mis-selling of mortgages, yet some claims management companies are already sending template letters to businesses, claiming that mortgages were mis-sold. The letters are easily produced but take a lot of time to answer—sometimes as long as 10 or 12 hours—because of the complexity of the mortgages.

The claims management regulator set up by the Ministry of Justice regularly shuts down CMCs that deliberately submit vexatious claims, but the number of claims companies is too high for the regulator to keep up. The number of companies is rising—it has doubled in the past two years to more than 3,000. The competition between them results in more vexatious claims and ever more aggressive tactics. In the years 2011-12, the regulator undertook only 150 visits and audits of firms, which is fewer than 5% of authorised CMCs.

I would be grateful if the Minister responded to a number of questions in her reply. Does she support the call of Which? for improved regulation of CMCs? Will she take steps to ban cold calling and cold texting? Will she take action to ensure that, in any advertisement, CMCs make clear to the client the benefit of their taking their claim directly, without intermediary, to the FOS? Will she place a duty on CMCs to ensure that the claims they submit contain accurate information? Claims companies should be required to exercise due diligence and must reasonably believe that there is a possibility of a valid claim. They must not be allowed to continue to fish for claims with very little consequence.

CMCs play an influential role in the UK’s compensation and redress regimes. They are responsible for almost half the complaints sent to the FOS, but make no financial contribution to its operating costs of around £107 million. In the light of that, will the Minister explore how CMCs can make a financial contribution to FOS running costs? For example, CMCs could be required to pay the £500 FOS case fee when they have not undertaken adequate checks to ensure there is a policy in place. The FOS dismisses charging for CMCS in “Charging for our work: modernising our case fee arrangements”, saying that charges will be passed on to customers. A simple solution would be to ban the collection of up-front fees and cap the percentage of a claim that a CMC can take. That would prevent their passing on to customers the reasonable charges that I argue should be levied on the industry.

Will the Minister take steps to ensure that CMCs accept leads only from organisations that are also regulated by the claims management regulator, organisations that are exempt introducers, or organisations that are regulated by another body, such as solicitors? There is concern that the FOS is insufficiently independent of the regulator, which is currently the FSA. Can that be scrutinised? Can appropriate action be taken to ensure a clear separation of powers and responsibilities? It seems unreasonable that a business must adhere to the adjudicator’s findings without a right of appeal and with no knowledge of the adjudicator’s qualification for making a decision. Can that be looked at with a view to equalising the playing field?

Finally, can steps be taken to ensure that the Ministry of Justice and the CMR have sufficient powers and capacity properly to regulate the business in a way that is fair to consumers and businesses? After all, we should support businesses such as Mr Broadbent’s. His business lends to other businesses and helps them to expand, fuelling the growth of the economy.

Claims companies are making huge amounts of money and filing huge numbers of claims against whatever businesses they can, regardless of whether they have mis-sold or even sold a PPI. At their worst, CMCs do not help the consumer, and damage businesses and clog up the regulators. Their proliferation must be stopped.

[The Parliamentary Under-Secretary of State for Justice (Mrs Helen Grant)]

I congratulate the hon. Member for Scunthorpe (Nic Dakin) on securing this debate on claims management companies, which remain topical. Clearly, there are serious conduct problems among a minority of CMCs, but it is worth remembering that some provide a useful service in identifying consumers who have suffered loss and supporting them in obtaining redress when they would otherwise receive nothing. While we have made good progress since the start of regulation, I acknowledge that there is more that can be done and should be done to improve the conduct of CMCs, and to strengthen consumer protection across the claims management industry. To that end, the Ministry of Justice claims management regulation unit remains committed to providing a stable and robust regulatory system that the public can trust. I am glad that the hon. Gentleman acknowledged the good work that the CMR unit is doing. It is stepping up its approach to improving CMC compliance and strengthening enforcement action through a range of measures.

The CMR unit has established a specialist compliance team to deal with poor practices used by some CMCs when handling claims for mis-sold payment protection insurance. In the past year, the compliance team has conducted more than 100 audits of CMCs assessed as high risk, issued warnings, and taken other forms of enforcement action where problems have been found. This work continues and includes targeting CMCs that are submitting poorly prepared or spurious claims, charging up-front fees and operating call centres, to ensure that sales calls are compliant.

On the problem of nuisance calls and text messages, we fully support the work of the Information Commissioner’s Office in enforcing the legislation that protects individuals from this form of direct marketing. We also recognise the benefits of a joint approach to tackling the problem. Before I go further, however, it is important to point out that spam texts that market claims services are generally not sent by CMCs, but by other organisations that generate leads for other businesses, including CMCs. The CMR unit is working with the ICO to investigate and take enforcement action against CMCs accepting leads or claims from this type of marketing.

Within the personal injury claims sector, most of the issues relate to businesses or organised groups attempting to defraud the insurance industry. The CMR unit contributes valuable intelligence and expertise, and has worked with a range of organisations and agencies to tackle fraud, including the Insurance Fraud Bureau, and police forces on a number of operations throughout the year. Those operations have resulted in arrests, charges and convictions. Much has therefore been achieved at a time when resources are limited. Since regulation began in 2007, the CMR unit has removed the licences of more than 900 CMCs across the sector. More recently, a major crackdown resulted in more than 400 CMCs being warned, suspended or having their licences cancelled. That has been done with no impact on the public purse, as regulation is self-financing.

So far, I have covered the good work that the CMR unit is doing to drive out malpractice. What I want to do now is to look further ahead to the programme of reforms we are introducing this year. Our reform plans give us all huge opportunities to do things better and to ensure that the regulatory framework continues to deliver effectively. This year’s reform agenda includes four main measures. Following a consultation exercise, we are proposing to tighten the conduct rules for CMCs. Most critically, we are proposing that contractual agreements between CMCs and consumers must be signed by clients before any fees can be taken. CMCs will only be permitted to refer to being regulated by the claims management regulator, rather than by the Ministry of Justice. CMCs will have to inform their contracted client of any variation or suspension of their authorisation. We intend to publish our response to the consultation shortly and, subject to the relevant Government clearance processes that can take some time, we expect implementation of the proposed changes to follow this summer.

Last year, we ran a public consultation on imposing a ban on CMCs offering financial rewards, or similar benefits, to potential claimants as an inducement to make a claim. The ban will come into effect from 1 April. Also from 1 April, we are implementing the primary recommendations contained in Lord Justice Jackson’s review of civil litigation costs, including in particular a ban on the payment and receipt of referral fees in personal injury cases and fundamental reform to the no win, no fee conditional fee agreements. That will include, in particular, a ban on the payment and receipt of referral fees in personal injury cases and fundamental reform to the no win, no fee conditional fee agreement.

[Kate Green]

I am aware of the changes being made to referral fees, but is the Minister aware of the concern that, because they will be brought within the ambit of the conditional free arrangements, CMCs will be able to use those CFAs as a means simply of replacing referral fees?

[Mrs Grant]

I think that our reforms have looked into these issues carefully and we have anticipated many of the issues to which the hon. Lady is alluding. I was going to touch on this in my speech anyway. We feel that our reforms have been carefully considered and are proportionate, appropriate and balanced, and that we now have to start to attack our compensation culture, which has been building up for many years. Obviously, the reforms will be reviewed within three to four years, and if further changes need to be made in order to create further balance and fairness, of course that can be considered.