PPI was one of the biggest mis-selling scandal to hit UK banks. However, the ugly side of the scandal was the rise of claim management companies
Payment Protection Insurance (PPI) was mis-sold on an industrial scale to consumers who couldn’t claim on these protection policies, or added to credit cards or loans without their knowledge. Billions have been recovered by consumers across the UK, with some saying that this unexpected windfall has helped keep the country’s economy stronger as a result of debts being paid down or extra spending on the high street.
However, as with all scandals there is always two sides to the story. With billions of pounds up for grabs, claim management companies (CMC) grew at an alarming rate, bombarding consumers via text messages and unsolicited calls offering to claim back PPI on their behalf. Considering that consumers could have completed forms freely available online, or used services such as the Financial Ombudsman Service, these CMC’s shouldn’t have ever taken off.
But they did. The Public Accounts Committee (PAC) found that during 2014-15, 80 per cent of complaints to the Ombudsman about PPI were made through claims management companies, not consumers. In many cases, these companies merely package up payment protection insurance claims, even though consumers could have easily acheived the same outcome themselves.
When you consider a typical charge by a claim management company for reclaiming PPI is between a quarter and a third of any compensation subsequently paid, it comes as no shock that The National Audit Office estimates that CMC’s received between £3.8 billion and £5 billion in commission from PPI payments between April 2011 and November 2015. Collectively, the public bodies involved – the Treasury, the Ministry of Justice, the FCA and the Ombudsman – have been too slow in taking responsibility for this situation, and too passive in allowing it to happen.
Action now is too late as the horse has bolted, but is still important, particularly as claims management activity may increase further if the FCA introduces a deadline for making PPI claims. The report recommended for the HM Treasury and the Ministry of Justice should report publicly on the effectiveness of their actions in reducing the role of claims management companies in PPI compensation.
Meanwhile the report revealed that the Ombudsman has a “large backlog” of PPI claims, with many consumers having to wait more than 2 years for a decision. There were around 400,000 new PPI claims to the Ombudsman in both 2012-13 and 2013-14, compared to around 120,000 in 2010-11.
The Ombudsman has reduced the number of open payment protection insurance cases from 445,000 in May 2013 to 234,000 in November 2015, but it has a large backlog of older cases-45% of open cases are more than 1 year old, and 17% (39,300) are more than 2 years old. In 2015-16 so far, half of PPI cases have taken 15 months or more to close.
Although factors outside the Ombudsman’s control may play a part, the Ombudsman did not give a convincing account of why many cases are taking so long to complete, the Committee said. The Ombudsman has told the NAO that it aims to clear the backlog of older cases by July 2017, but it has not yet outlined a plan for doing so.
The Committee recommended by the end of July 2016, the Ombudsman should set out publicly a clear timetable for reducing and ultimately eliminating its backlog of PPI claims, and also report publicly on its progress.
Gillian Guy, Chief Executive of Citizens Advice, said: “Unscrupulous claims management companies have preyed on victims of the PPI scandal. It’s bad enough banks let consumers down over PPI, but the fact some claims companies were able to swoop in and unfairly siphon off compensation adds insult to injury.
“Our evidence shows up to 39 per cent of customers did not know they could make a claim without these firms. It’s crucial free, independent advice is available for anyone caught up in PPI so that they can seek compensation without the need to pay fees.
“We would also like to see the Claims Management Regulator continue to take enforcement action against firms that are shown to be operating outside the rules.”
Meg Hillier MP, Chair of the PAC, said: “The widespread mis-selling of PPI is a vivid demonstration of the risks facing consumers in the financial services market. The fall-out is still with us. Many people have waited years for a decision on compensation and, because of the way they have pursued their claims, even then they may not receive the full amount. Serious risks of further mis-selling remain.
“It is vital the Government and regulators take fresh action now to better protect taxpayers’ interests, both in reducing the potential for mis-selling and, when it does occur, to ensure those affected get their due compensation. We heard evidence of some diverse causes for products being mis-sold, ranging from incompetent or intimidating sales teams to badly designed and poorly targeted products.
Hillier concluded: “It is deeply worrying that while the FCA has taken some action to deal with these causes, it has since scrapped plans for a review of banks’ culture—this despite it being best placed in the system to conduct such a review.
“This sends a confused message to taxpayers and will do little to reassure potential customers. Our Report sets out practical measures to address this and ensure the interests of taxpayers are paramount now and in future.”
The committee said that while the FCA has taken some action to deal with these, “the risks of mis-selling remain, for example pensions freedoms reforms are a potential trigger for future mass mis-selling”.
The Report also warns: “The FCA has withdrawn a planned review of banks’ culture, but has not articulated what culture it expects firms to have. There is no guarantee that any improvements in cultures will stick as the regulatory spotlight moves away.”
In its recommendations the Committee urges the FCA to “outline the actions it will take to improve cultures in financial services firms, and report to us on their effectiveness in a year’s time”.