Back in May, we wrote that the Financial Ombudsman Service (FOS) had shone a light on wide spread and long standing industry concern about claims management companies (CMCs). The FOS said that it had become increasingly concerned about CMCs presenting spurious complaints, misleading customers and sometimes leaving them financially out of pocket.

Life, it now seems, is about to get harder for CMCs who misbehave.

In a welcome move for both banks and customers alike the Government has just launched a package of measures aiming at getting tough with CMCs.

On 28 August 2012 the Ministry of Justice (MoJ) announced that from 2013 the Legal Ombudsman Service will take over handling customer complaints about CMCs from the MoJ. It is a fact that CMCs generate large volumes of consumer complaints; Government figures show that almost 75% of these complaints relate to claims involving payment protection insurance policies. The big change here is that the Legal Ombudsman can force CMCs to pay customers compensation for poor service. The Ombudsman has the power to award up to £30,000 in compensation, although it is keen to stress that most awards amount to less than £250.

The Government has said that this change will also allow the MoJ, which will continue to regulate CMCs through the Claims Management Regulation Unit (CMRU) to refocus its resources on working with the CMC industry to improve standards and to take action against CMCs who consistently break the rules.

The Chief Legal Ombudsman Adam Sampson welcomed the news, adding that he was confident that the Ombudsman could support the CMRU to improve standards across the industry with the priority now being to ensure that the Ombudsman was ready to start accepting complaints once the necessary arrangements were in place.

This news came hot on the heels of a Government announcement on 22 August 2012 that it was launching a consultation (which ends on 3 October 2012) about proposed reforms to the CMC industry.

The recommendations reflect a number of serious issues which have been observed in the industry and aim to promote greater fairness for consumers. The MoJ has highlighted three main changes:

  • CMC’s regulatory status: currently, CMCs are allowed to state in adverts that they are regulated by the MoJ. This has often led to consumers mistakenly believing that the CMC is actively endorsed by the MoJ. The amendment would only allow CMCs to state that they are regulated by the CMRU.
  • Contracts must be in writing: at the moment, the rules allow CMCs to enter into verbal contracts with consumers over the telephone. Consumers often complain that they have not been given sufficient time to consider the terms of the agreement – or even that they did not know they had entered into a contract at all. It is proposed that a written agreement should be in place before CMCs are permitted to charge fees.
  • Keeping customers updated: the CMRU has indicated that customers could be unaware that the CMC has had its authorisation varied or suspended. CMCs are already required to keep their clients updated on the progress of the claim, but the new proposals would also require them to inform their customer of any change to their authorisation.

The consultation also deals with a number of other issues, including the regulation of cold calling and other unsolicited communications; and restrictions on the fees that CMCs may charge.

We must wait to see how many of these welcome proposals will become law but, combined with the transfer of complaint handling to the Legal Ombudsman, it does show that the Government is serious about dealing with wide spread concern about unscrupulous CMCs and tackling the reputation of the CMRU as a “toothless tiger”.