Claims Management Companies

Lord Kennedy of Southwark Excerpts

Tuesday 29th May 2012 Lords Chamber

Asked By

[Lord Kennedy of Southwark]

To ask Her Majesty’s Government what action they are taking to ensure that all claims management companies operating in the United Kingdom deliver services to a high standard.

[Lord Kennedy of Southwark]

My Lords, I am delighted to open this debate and I am very pleased that the noble Baroness, Lady Verma, is responding for the Government. I am sorry that the noble Lord, Lord McNally, is unable to be present today but I know that he has other business and would attend if he could. I received a very positive Answer from him to my parliamentary Question some weeks ago. We also had a very constructive meeting at the MoJ, which his colleague Jonathan Djanogly also attended, as did representatives of Which?, the consumer organisation. I hope that today’s debate will be another part of that constructive dialogue.

Claims management companies have increased in number and have come to the attention of the public and the industries in which they operate much more in recent years. You have only to turn on the TV or listen to the radio to be bombarded with advertisements from claims management companies. What do these firms do? Put simply, they manage claims for compensation on behalf of consumers to a variety of bodies and industries, and charge the consumer a fee for that service. In the case of payment protection insurance claims, that fee can be as much as 30% of the successful claim. A consumer who received £3,000 for PPI mis-selling would give £1,000 of their compensation to the CMC for, I contend, the relatively little work that it had undertaken. If the consumer decides to dispense with the CMC’s services before the conclusion of any claim, charges of £90 per hour plus VAT for the time spent on the claim are not uncommon.

It is right that I should say early in the debate that many in the claims management industry act responsibly. I fully accept that it is an individual’s choice to use a CMC to pursue a claim if they wish. However, large numbers of those in the industry do not adhere to best practice and a few could even be described as rouges. The Government need to take a long, hard look at the industry, look at existing provisions and make a number of changes to beef up existing regulation and ensure that existing provisions are used effectively in an industry that needs effective policing. The Government may have a preference for self-regulation and industry codes of practice. That is fine where it is demonstrated to work effectively but, where it is not, the Government have a duty to act. Noble Lords will be aware that the Compensation Act 2006 provides the broad basis for the regulation of this industry, supplemented where applicable by other consumer protection legislation and depending on the activity of FSA rules.

As I said, the claims management industry has grown considerably in recent years and more than 3,200 authorised firms operate today. The part of the industry that does not adhere to best practice will breach guidelines on cold calling, text messaging and e-mail. Some will take up-front fees and/or fail to disclose properly the amount of compensation a consumer will pay if their claim is successful. Through high-pressure sales they will sign up people who have no possibility of making a successful claim on the basis that they can get you thousands of pounds in compensation. A few weeks ago I witnessed a firm in my local shopping centre going up to people and telling them they could get them thousands of pounds in compensation. That sort of activity is prohibited under existing regulation, but unless it is effectively policed it comes to nothing.

Many noble Lords in the Bishops’ Bar, the Peers’ Guest Room and elsewhere in your Lordships’ House have told me of the text messages and phone calls that they have received which say, “We can get you compensation for that fall you had, that car crash you were involved in or that PPI you were mis-sold”. They then say, “But I haven’t had a fall or a car crash, and I haven’t got any PPI”. This sort of activity is what those sections of the industry that do not adhere to the highest standards indulge in. Also, there are companies that bombard a whole raft of financial institutions with PPI claims on behalf of a customer, without even bothering to check whether the customer has ever had any dealings with the institutions concerned before submitting the claims. This is bad practice and these are ridiculous and vexatious claims. All they do is waste the time and money of the financial institutions concerned, and divert resources from dealing with genuine complaints so that consumers wait even longer for their cases to be dealt with.

It gets worse. After dealing with the financial institution, or in some cases without even bothering to go there, CMCs have been known to submit bulk claims to the Financial Ombudsman Service, again wasting time, costing money to everyone but them and making genuine complainants wait even longer to have their complaint dealt with. Therefore, we need action from the Government and I have a number of points to put to the noble Baroness, Lady Verma. I do not expect a reply today but I am sure she will write to me, covering the points I am raising.

There is a voluntary code to which some CMCs have signed up. It is about time that we had some declaration from the Government that they want the industry to come together to agree on this voluntary code or some variation on it, and that if it does not happen very soon the Government may force their hand by regulating or legislating further. To put it another way: clean up your act or we will clean it up for you. Where companies have been found to have acted illegally, naming and shaming should be considered as well as disbarring them from further trading.

The Government should consider whether the CMC industry should have to make a contribution to the Financial Ombudsman Service. I suggest that for every ridiculous, pointless, vexatious claim submitted by a CMC to the Financial Ombudsman Service, where it is shown that the consumer has never done business with the financial institution concerned, the CMC should have to pay a £500 contribution to the working of the Financial Ombudsman Service for wasting its time.

I am worried that firms put “Regulated by the MoJ” on their literature as some sort of badge of honour or approval. That should be changed, maybe to something like, “If you have any complaints about this firm, ring the claims management regulator on the following number”. I am not satisfied that enough resources are being put into the claims management regulator by the Government. When you consider that £6 billion has been put to one side by the financial services industry to pay PPI claims, you can see that a potential £2 billion in fees is a very big slice of cake. Existing regulation is deficient in areas such as training, standards and competences. We need a discussion on how these firms should operate in the future.

The Government should also give serious consideration to bringing claims management firms within the remit of the statutory Legal Services Ombudsman. This would mean that consumers could complain about service failure by claims management firms to an independent body and receive a fair and thorough route to redress. This last point is particularly important as it is consumers who are being ripped off. I for one—and, I am sure, all noble Lords present—do not want us to be debating the claims management companies scandal and what we will do to redress it in a few years’ time.

I look forward to the response of the noble Baroness and to the contributions of the noble Baroness, Lady Scott of Needham Market, and my noble friends Lady Sherlock and Lord Stevenson.