Weather experts are predicting a cold winter ahead, however claims management companies (CMCs) will already be feeling the chill following the payment protection insurance (PPI) deadline. The bonanza peaked in August with a huge surge in demand for compensation, with banks being forced to make payments totaling around £50 billion.
PPI claims bought rich pickings for claims management companies, with many making millions of pounds and CEO’s profiting massively. At its height as a sector, around 20,000 people were employed. But the party had to end eventually, with the FCA announcing in March 2017 that PPI claims would need to stop from August 29th 2019 as well as enforcing a cap on commission that claims management companies could make in July 2018, meaning firms could only charge 20% plus VAT on a claim.
Even so, prior to this, many had charged around a third in commission and even after the cap was imposed, it was reported that some flouted the new rule and continued to charge higher sums because customers were unaware of how much should be charged.
However, in April 2019, the FCA took over as regulator and this combined with the cessation of PPI claims, has ushered in a new era. So what happens next? There is no doubt that there is resilience and plenty of entrepreneurialism in the claims management industry, and a range of alternative markets are currently being targeted including:
Packaged bank accounts
Pension transfer advice
Guaranteed Asset Protection (GAP insurance)
However, the above are unlikely to produce anywhere near the same amount of revenue as PPI figures and for this reason there is expected to be a marked contraction of claims management companies. It is understood that only around 350 CMCs with financial services specialism have secured FCA authorization, in comparison to almost 700 that were active in the sector previously and there may well be a further reduction in numbers.
For those who have opted for authorization, the FCA has shown that it is taking a robust approach to regulation and visits from its supervisory teams have been taking place.
CMCs must now maintain a set of standards such as ensuring there is full understanding from customers – as in making them aware of what costs they will incur and how the process works. This includes clear information about fees and any termination fees. On top of this, they need to know their rights under the Financial Services Compensation Scheme and if they are dissatisfied with the service they receive for a claim, that they can complain to the Financial Ombudsman.
Meanwhile in August, the FCA also made it clear that there needed to be an improvement in the way some CMCs advertised their services. CMCs must also take a far more stringent approach to where they obtain data from third parties, with lists of potential new business leads needing to go through due diligence to ensure it has been obtained legally.
However, it should be noted that the regulator does appreciate there is a place for well-run CMC – even if some financial services providers would like to see their demise altogether. Yet in research, the FCA found that 67% of customers who had used a CMC over the past three years to make a claim would not have done so if they had been required to act without help.
So the FCA has acknowledged that “many CMCs play a significant role in helping consumers to secure compensation” and according to Jonathan Davidson, the FCA’s executive director of supervision:
“As in many regulatory issues, it’s often a few bad actors that tarnish the reputation for the many, and our aim as a regulator is come down on them very hard.”
For the smaller number of CMCs that play by the rules, there is a future, but unless another vast mis-selling scandal emerges, it will be a far more restrained one.