broader context the creation and growth of the claims management market

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2 broader context the creation and growth of the claims management market The current circumstances need to be set in the broader context of the development of claims companies and of the issues around the mis-selling of payment protection insurance (PPI). Unfortunately, PPI is only the latest of a series of areas where claims companies have flourished in financial services following widespread failings by financial businesses. Claims companies are not, of course, a new phenomenon. Outside our own immediate sphere, claims companies (and law businesses with similar operating models) have had a major role in the miners compensation saga and in personal injury claims. We first saw claims managers operating in sizable numbers during the mortgage endowment mis-selling episode. The extent of public concern about mis-sold mortgage endowments alongside the decision by the FSA to address the mis-selling through a complaint-based strategy gave claims companies a clear target market. And the initially poor standard of complaints handling by some banks and insurers resulted in many consumers feeling they could not trust their provider to treat their endowment complaint fairly. In short, consumers became increasingly aware of the level of detriment they might have suffered, were not being offered redress proactively, and did not trust their provider to handle a complaint fairly. In these circumstances, a claims company offering to fight your cause for you became an attractive proposition for many consumers. The subsequent disputes around current-account charges provided a new impetus to the growth of claims companies in financial services. Then, as the scale of PPI detriment became publicly known, and with the banks very publicly challenging the FSA and the ombudsman in the courts, the claims companies had a fertile market for pushing their message of you ll need us to fight your corner. specific factors leading to the growth of claims companies in PPI As is now generally accepted, the scale of mis-selling of PPI by many financial businesses was widespread and went back many years. With an estimated 16 million policies sold since 2005 alone, many consumers have been sold policies that they did not need or could not use. As the FSA s work and our own casework attests, far too often banks and other businesses systematically misled consumers about the insurance product they were recommending. In some cases, lenders simply added the insurance without their customer s knowledge or consent. This so-called assumptive selling practice is a particular and troublesome feature of the PPI story that continues to raise problems for consumers and financial businesses alike. The sheer scale of this detriment has made PPI a rich opportunity for claims companies to exploit. This has been compounded by a process for getting redress that has seemed confusing and fraught for many consumers resulting in their feeling unable to take on their bank on their own. The first problem here was the length of time between the problem becoming publicly known and consumers getting easy access to fair complaint handling (or in consumer language, access to justice ). Citizens Advice raised a super-complaint to the OFT about the mis-selling of PPI back in 2006, when this became a mainstream issue in the media. Yet it took many years for action. And by the time the FSA published its final guidance on PPI complaints handling in 2010, hundreds of thousands of consumers had already had their complaints rejected by their bank, requiring them to come to the ombudsman for an impartial hearing. 2

3 It appears that banks and other financial businesses were prepared to delay the resolution of the issues, as they continued to fight legal challenges involving the Competition Commission, the FSA on its regulatory guidance and our own well-established approach to PPI complaints. This made it all the more easy for claims companies to promote their message that you need help to get justice. The second problem was that the approach determined for PPI compensation was complaints based rather than based on proactive redress. Banks have consistently argued for a reactive complaints-based approach, rather than one requiring them to take proactive steps to contact and compensate their affected customers. The consequence of this is that each consumer is required to raise their own individual complaint only helping to fuel further an industry that markets itself as taking the work away from you. Following the banks failed judicial review of the FSA and the ombudsman, we have now at least reached the point where there is a clear approach to investigating and resolving PPI complaints, that financial businesses are required to follow. However, given the volume of past PPI sales, it is not surprising that banks and others are now experiencing record volumes of complaints. The evidence suggests that before and since 2005, mis-selling was widespread. So it seems likely that high volumes of complaints can be expected for some time. These volumes are now reflected in the higher financial provisions being made by the banks to cover the cost of redress that is due. Given these circumstances, the current unhappy situation is not, therefore, particularly surprising. harm caused by claims companies Superficially it could be argued that claims companies are simply helping consumers achieve justice. However, the way in which many of them are operating is to sell their services in much the same way that many banks themselves used to sell PPI a way that is misleading to the consumer, selling them services they do not need or cannot use. To my mind, the most troublesome feature of the current claims industry is simply that consumers are paying for a service they do not need. While some consumers may consciously make the choice to employ a claims company to avoid the need to engage with their bank themselves, the notion that a claims company is a necessary expense to get fair redress is simply wrong. And many consumers are being badly misled by the actions of claims companies into believing that they have little choice other than to use them. The advertising and marketing campaigns run by claims companies are routinely misleading and at worst often factually incorrect. Research carried out by Which? has shown that claimscompany sales staff regularly tell consumers that they will get a better result if they use a claims company or that it is extremely hard, or even impossible, to get compensation without their help. And we regularly see cases where a consumer has been persuaded to pay an upfront fee for a claims company to investigate their case when they never had a PPI policy in the first place. The scale of this detriment is significant. Of 9 billion provisioned by businesses to pay compensation to consumers, up to 2 billion could be passed direct to a sector that has added virtually no value to consumers in terms of helping them get redress, and that many consumers have paid for because they were mis-sold the service. 3

4 communication with consumers Moving now to solutions. It seems to me that a crucial issue here is the importance of proactive communication with consumers by businesses and regulators alike. Claims companies achieved such a significant place in PPI redress primarily because they have been able to fill a communication vacuum. Poor sales practices by financial businesses often give rise to few complaints because many consumers are simply unaware that they have been given unsatisfactory advice or have been misled. Without specific action to draw the issue to the attention of consumers, complaint volumes may be relatively low. This is even more likely to be the case in circumstances where many consumers did not even realise they had been sold PPI in the first place. So unless businesses contact customers proactively (as they did in the case of endowment mortgages) or unless there is extensive communication by the regulator (as happened with the pensions review) consumers may remain unaware of the steps they should take to put matters right. In the case of PPI, claims companies have filled this gap with their own extensive advertising and marketing. Yet the tens of millions of pounds currently being spent by claims companies on advertising is not being paid for by the FSA or the ombudsman service let alone by the banks. It is paid for ultimately by consumers themselves out of their own redress. So it is perhaps not surprising that consumers may feel that only their claims company is on their side advertising the fact that compensation is available and winning redress for them. The FSA has required some additional action by financial businesses involving proactive back book reviews of some of the areas where sales practice appears most dubious. This will be very welcome. This proactive contact with those consumers most likely to have been disadvantaged should relieve burdens on consumers and reduce the scope for claims management activity in this area. More generally, however, claims companies have been able to carve out a distinct role for themselves by bringing consumers attention to the issue of PPI mis-selling and redress. This has enabled them to shape and dominate much of the discourse between consumers and banks on PPI. It is probably now too late for PPI but if similar circumstance were to arise again, I believe strongly that regulators, and any businesses that fail their customers, should do more to draw the issue to the attention of consumers, in a manner that ensures more engaged consumer attention and focus. It goes without saying that the sooner any such intervention can take place after detriment is recognised, the less chance there is for claims companies to take advantage of and dominate the redress landscape. 4

5 next steps Despite the rationale for why the current landscape is as it is, there are clearly current problems with the conduct of claims companies. Certainly not all claims companies (or, to be clear, financial businesses) are acting fairly in their dealings with consumers and the way they handle complaints. It seems to me that there are four areas worthy of immediate attention. The first is around the marketing practices of claims companies. There is a need to take a firmer line on abuses of consumer data and cold calling by some claims companies. The Ministry of Justice is starting to tackle these issues but has been under-resourced for the task. Until recently it has focused more on the (admittedly troublesome) personal injury sector of claims management activity. We believe there needs to be far stronger conduct regulation, within the framework of the existing rules, with tough action on companies that abuse the law. The second is around speculative complaints. Some banks report that over a third of the complaints they are receiving turn out to be cases where the consumer either had no PPI policy or was never a customer of the bank. But for a consumer to ask their lender to check whether or not it added PPI to their loan is not an unreasonable request, given past selling practices. And the question is raised by consumers directly, as well as by those who have appointed a claims manager. However, behind the headlines, practices vary. Some claims companies make little, if any, effort to uncover even the most basic information about the customer and their financial arrangements. Consumers who have not taken out a loan in the last two decades are still being persuaded by claims company sales-staff to pay upfront fees for an investigation unlikely to produce any results. Our casework shows that financial businesses, as well, often fail to respond constructively and accurately to these initial enquiries telling the consumer or the claims manager that there was no PPI associated with the customer s accounts, even though our own enquiries subsequently uncover that a PPI policy was sold after all. This is why in January this year, following a seminar we hosted for claims companies and lenders, we set out in an open letter our expectations about how such cases should be investigated. Where our approach is followed by both parties, the number of problems has declined. But we have no powers to impose our proposals on either claims companies or financial businesses. We have also raised with the FSA the need to clarify its complaints-handling rules, so that banks and other businesses are clear as to whether general enquiries about the customer s circumstances should be handled as complaints and be subject to the same rules and time limits. There is a balancing act to be struck here. Our goal needs to be to help consumers with genuine enquiries, while deterring merely speculative and scatter-gun approaches by claims companies. Where we see claims companies appearing to make highly speculative or vexatious enquiries, we draw this to the attention of the Ministry of Justice. Similarly, where we see financial businesses that are not responding thoughtfully and fairly to general enquiries about PPI, we draw it to the attention of the FSA. The third area is around how claims companies carry out the service they are paid by consumers to deliver. In many cases we see, information and allegations are made to fit a standardised template. In the worst cases, the evidence is simply wrong or even fabricated. 5

6 One of our roles at the ombudsman service is to get to the heart of the matter, establishing as far as possible the true facts of each individual case and reaching balanced judgements on the merits of the dispute. In practice, generic allegations from claims companies rather like the generic assurances of good practice by financial businesses are of little, if any, evidential value in assessing individual cases. Direct testimony from the consumer, on the other hand, is always helpful. And where we think it is necessary for the fair resolution of a dispute, we will seek to obtain it. This is an area where a stronger sense of professional standards on the part of claims companies would be helpful. The current regulatory framework under the Ministry of Justice places little focus on the way claims managers pursue cases. That said, ensuring good standards in practice would require concerted effort by the Ministry of Justice. This would, in turn, require a significant expansion in regulatory resource. This may be an area where the ombudsman service can play a constructive role in helping the regulator. We already set out the information we expect claims companies and financial businesses alike to provide when a case is referred to us and we set out clearly how we assess that information. The work we have already done could help the Ministry of Justice to develop stronger conduct regulation. However, it also seems to us that consumers using claims companies should have access to justice, if the company they have employed to represent them does not do so to an appropriate level of professionalism, or misleads them. Strangely, there is no ombudsman service covering claims companies so consumers who want to complain about a claims company have nowhere to turn. We understand that the Legal Ombudsman is prepared to take on this role, with the costs of this coming from the claims management sector itself (following a polluter pays model). We believe that that this would be a sensible step forward, and one which should be made quickly. Finally, there is the issue of the clarity and fairness of claims management charges. Typically, these charges amount to 30% or more of the redress obtained. The sums involved can be significant. While typically redress in PPI might be around 2,000, redress of more than 20,000 is not unusual. Many customers appear to approach this with the mindset of 70% of something is better than 100% of nothing. There is a strong sense for many consumers that their bank cannot be trusted to handle these complaints fairly so a claims company is seen as a necessary service. However, if consumers realised that it is relatively simple to bring a complaint themselves and that using a claims company does not save them any time or get them any different results they may behave differently. We already know that there is very little competition between claims companies based on price which tells us that consumers are not easily able to understand the charges levied. And we know from our own contact with consumers that many of these charges are not transparent. It seems to me that two steps are needed here. First, many claims companies need to be much more straightforward and open about their charges. They are inevitably keen to emphasis that they operate on a no win, no fee basis. But they are less keen to set out clearly the extent of their charges if they are successful in winning redress. Second, I believe there is more that the financial services industry, consumer groups and the ombudsman service can all do, to highlight that consumers do not need to use claims companies or pay for representation to have their complaints resolved fairly. The current initiative being led by Which? and MoneySavingExpert along with the BBA is seeking ways to deliver this message to consumers. We are playing an active part in this work. 6

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