Do regulated Claims Management Companies charge too much in fees for consumers making financial services claims? The Ministry of Justice wants your views.
Earlier this month, the MoJ launched a consultation into the fees charged by CMCs for financial services claims. Fees vary wildly across the Financial Products and Services sector, where CMC fees paid by consumers currently range from 10% to 40% of the final compensation awarded, with average fees typically being at 25-30% of final compensation. Sometimes consumers also pay significant upfront fees for the CMC to take their claim forward.
Very often, the consumer shouldn't actually need to pay any fees at all, because the forum where the CMC makes the consumer's claim is free to use (like FOS), and so the high level of fees is particularly troubling. CMCs are already required to unambiguously let consumers know about Ombudsman schemes (FOS again) or official redress schemes- but it seems the message isn't getting through.
Persistent marketing is identified by the MoJ as a possible factor in persuading consumers to sign up with a CMC- haven't we all received an unsolicited call from a CMC keen to persuade us to bring a PPI claim? It seems that, despite the current requirements, consumers aren't getting the message that they can shop around, or even pursue their claim direct, but instead are signing up with the first CMC which contacts them.
CMCs charge high fees for straightforward work to bring claims which can be brought for free. Add in an upfront fee, and you have a recipe for volume speculative and/or pro forma claims. For example, the MoJ found that claims are regularly brought where there is in fact no policy, or no link between the consumer and the product provider, and all CMC claims which come across my desk are indeed made on a pro forma basis. Increased, and unnecessary, pressure on defendant businesses and FOS is the result.
And so the question is- are CMCs worth their fees? Even their regulator isn't convinced, with the consultation paper suggesting that: "Where bulk claim types... are concerned, we believe that CMCs can, in some instances, offer little value to the consumer... Consumers can be charged hundreds of pounds upfront... or face having a large percentage of any final compensation awarded taken by a CMC where minimal work may have been completed on their behalf."
The MoJ's proposals include:
- cap maximum completion fee to 15% inc VAT for bulk claims with a single lender and cap the overall charge for claims worth more than £2,000 in total to £300;
- a maximum cancellation fee of £300 for bulk claims when a consumer cancels after the initial 14 day 'cooling off period;
- ban CMCs from receiving or making payment for referrals;
- ban any fees where no relationship is found between consumer and lender;
- ban all upfront fees for all financial claims;
- cap the maximum completion fee at 25% inc VAT of the final amount of compensation awarded.
Will these proposals work? Rebus' recent high profile failure throws this question into sharp relief. Rebus sought to focus on the 'higher end' of the financial services CMC market, targeting tax mitigation schemes, pension products, and complex investment and banking products. Rebus charged both an upfront fee (£3,000 plus VAT) and a 'successfee' of 20% plus VAT of all sums received. In other words, while the success fee (or completion fee, to use the MoJ's phrase) was towards the lower end of the market, the upfront fee was very significant.
But it seems the business model didn't work. Last year, Rebus notoriously raised over £800,000 in finance via a tax mitigating EIS investment on a crowdfunding platform but, despite this extra injection of cash, the company entered administration in early 2016.
An upfront fee of £3,000 wasn't enough to keep Rebus afloat, so it's a safe bet that a ban on all upfront fees would have hastened Rebus' demise. A ban on upfront fees is likely to make CMCs like Rebus take a long, hard look at the clients they take on, because the only way for the CMC to make money will be by taking a cut of final compensation- so the CMC will want to be fairly sure that the client has a winning case.
This suggests the MoJ could achieve their aim of reducing the number of speculative claims and relieving the burden on defendant businesses and FOS. A further step might be to make CMCs pay an upfront fee for bringing a complaint to FOS (similar to the fee payable by defendant firms) or perhaps a levy, as I suggested a couple of years ago on this blog.