Question for Short Debate
My Lords, I am delighted to open this debate and I am very pleased that the noble Baroness, Lady Verma, is responding for the Government. I am sorry that the noble Lord, Lord McNally, is unable to be present today but I know that he has other business and would attend if he could. I received a very positive Answer from him to my parliamentary Question some weeks ago. We also had a very constructive meeting at the MoJ, which his colleague Jonathan Djanogly also attended, as did representatives of Which?, the consumer organisation. I hope that today’s debate will be another part of that constructive dialogue.
Claims management companies have increased in number and have come to the attention of the public and the industries in which they operate much more in recent years. You have only to turn on the TV or listen to the radio to be bombarded with advertisements from claims management companies. What do these firms do? Put simply, they manage claims for compensation on behalf of consumers to a variety of bodies and industries, and charge the consumer a fee for that service. In the case of payment protection insurance claims, that fee can be as much as 30% of the successful claim. A consumer who received £3,000 for PPI mis-selling would give £1,000 of their compensation to the CMC for, I contend, the relatively little work that it had undertaken. If the consumer decides to dispense with the CMC’s services before the conclusion of any claim, charges of £90 per hour plus VAT for the time spent on the claim are not uncommon.
It is right that I should say early in the debate that many in the claims management industry act responsibly. I fully accept that it is an individual’s choice to use a CMC to pursue a claim if they wish. However, large numbers of those in the industry do not adhere to best practice and a few could even be described as rouges. The Government need to take a long, hard look at the industry, look at existing provisions and make a number of changes to beef up existing regulation and ensure that existing provisions are used effectively in an industry that needs effective policing. The Government may have a preference for self-regulation and industry codes of practice. That is fine where it is demonstrated to work effectively but, where it is not, the Government have a duty to act. Noble Lords will be aware that the Compensation Act 2006 provides the broad basis for the regulation of this industry, supplemented where applicable by other consumer protection legislation and depending on the activity of FSA rules.
As I said, the claims management industry has grown considerably in recent years and more than 3,200 authorised firms operate today. The part of the industry that does not adhere to best practice will breach guidelines on cold calling, text messaging and e-mail. Some will take up-front fees and/or fail to disclose properly the amount of compensation a consumer will pay if their claim is successful. Through high-pressure sales they will sign up people who have no possibility of making a successful claim on the basis that they can get you thousands of pounds in compensation. A few weeks ago I witnessed a firm in my local shopping centre going up to people and telling them they could get them thousands of pounds in compensation. That sort of activity is prohibited under existing regulation, but unless it is effectively policed it comes to nothing.
Many noble Lords in the Bishops’ Bar, the Peers’ Guest Room and elsewhere in your Lordships’ House have told me of the text messages and phone calls that they have received which say, “We can get you compensation for that fall you had, that car crash you were involved in or that PPI you were mis-sold”. They then say, “But I haven’t had a fall or a car crash, and I haven’t got any PPI”. This sort of activity is what those sections of the industry that do not adhere to the highest standards indulge in. Also, there are companies that bombard a whole raft of financial institutions with PPI claims on behalf of a customer, without even bothering to check whether the customer has ever had any dealings with the institutions concerned before submitting the claims. This is bad practice and these are ridiculous and vexatious claims. All they do is waste the time and money of the financial institutions concerned, and divert resources from dealing with genuine complaints so that consumers wait even longer for their cases to be dealt with.
It gets worse. After dealing with the financial institution, or in some cases without even bothering to go there, CMCs have been known to submit bulk claims to the Financial Ombudsman Service, again wasting time, costing money to everyone but them and making genuine complainants wait even longer to have their complaint dealt with. Therefore, we need action from the Government and I have a number of points to put to the noble Baroness, Lady Verma. I do not expect a reply today but I am sure she will write to me, covering the points I am raising.
There is a voluntary code to which some CMCs have signed up. It is about time that we had some declaration from the Government that they want the industry to come together to agree on this voluntary code or some variation on it, and that if it does not happen very soon the Government may force their hand by regulating or legislating further. To put it another way: clean up your act or we will clean it up for you. Where companies have been found to have acted illegally, naming and shaming should be considered as well as disbarring them from further trading.
The Government should consider whether the CMC industry should have to make a contribution to the Financial Ombudsman Service. I suggest that for every ridiculous, pointless, vexatious claim submitted by a CMC to the Financial Ombudsman Service, where it is shown that the consumer has never done business with the financial institution concerned, the CMC should have to pay a £500 contribution to the working of the Financial Ombudsman Service for wasting its time.
I am worried that firms put “Regulated by the MoJ” on their literature as some sort of badge of honour or approval. That should be changed, maybe to something like, “If you have any complaints about this firm, ring the claims management regulator on the following number”. I am not satisfied that enough resources are being put into the claims management regulator by the Government. When you consider that £6 billion has been put to one side by the financial services industry to pay PPI claims, you can see that a potential £2 billion in fees is a very big slice of cake. Existing regulation is deficient in areas such as training, standards and competences. We need a discussion on how these firms should operate in the future.
The Government should also give serious consideration to bringing claims management firms within the remit of the statutory Legal Services Ombudsman. This would mean that consumers could complain about service failure by claims management firms to an independent body and receive a fair and thorough route to redress. This last point is particularly important as it is consumers who are being ripped off. I for one—and, I am sure, all noble Lords present—do not want us to be debating the claims management companies scandal and what we will do to redress it in a few years’ time.
I look forward to the response of the noble Baroness and to the contributions of the noble Baroness, Lady Scott of Needham Market, and my noble friends Lady Sherlock and Lord Stevenson.
My Lords, I thank the noble Lord, Lord Kennedy, for securing today’s debate. Topics such as this, which are limited in scope but of real importance to the public, are exactly the sort suited to one hour Questions for Short Debate. The noble Lord has done us a great service by drawing attention to the many problems which are being caused by poor practice and, indeed, often illegal practice, in this area.
I suspect that had the noble Lord tabled a Question for Short Debate on the level of nuisance calls from claims management companies, he would have been overwhelmed by speakers. The number of calls from companies selling their so-called services for payment protection insurance, utility deals, home insulation schemes and accident compensation has now reached epidemic proportions. Debt consolidation services are particularly perfidious, preying as they do on those who are already vulnerable. At home in Suffolk, I routinely receive two or three calls every day from such companies. On one glorious evening, I received five. These related either to PPI, which I have never taken up, to a loan which has never existed, or to some accident which I have never had. It is irritating enough for me, but for elderly and disabled people who physically struggle to get to the phone, this is a real problem. I am increasingly finding people who have turned off their landlines because of the intrusion of these calls. I recently moved to a new flat in London. I had a new phone connected and it was a mere 30 minutes before I received my first PPI call. When the claims management industry gets your number faster than your husband does, things have come to a pretty pass.
The Financial Ombudsman Service website states that when it investigates a complaint, it expects to see evidence that a financial business has carried out a reasonable search to ascertain whether there has ever been a PPI policy. If only the dozen or so companies contacting me every week would do so. As we have heard from the noble Lord already, the impact on the financial services institutions in investigating completely bogus claims is quite large. I ask the noble Baroness: what can be done to oblige companies to do this research before they start down this route?
Will the noble Baroness also raise with Ofcom the question of nuisance calling, particularly the effectiveness of the telephone preference service? Signing up to this service is often offered up as a solution, and millions have done so. However, complaints are simply passed on to the Information Commissioner, as the telephone preference service itself has no enforcement power. Can the Minister confirm that to date there has not been a single case of prosecution under the Act? Would she agree that the epidemic growth in these calls is a demonstration of the fact that the TPS system as currently set up is simply not working? Is she able to say, through work done by the Information Commissioner, what percentage of the problems is caused by overseas phone calls, which are, of course, outside the scope of the telephone preference service?
One of the most worrying aspects of all this is that of data protection. There are many organisations—scandalously, these include public bodies—to which we give information in good faith, which routinely sell on this data. Once they have the details, they sell them on, so that it is impossible to escape from their clutches. I am sure I am not alone in being alarmed that not only my home and mobile phone numbers are used, but increasingly my parliamentary e-mail as well.
The Ministry of Justice website has a large section dedicated to claims management issues. I read with interest that companies should:
“not engage in face to face ‘cold calling’, or in any form of high pressure selling”.
That leads me to reflect that either the companies which are doing the calling are not registered, or that they are registered and are flouting the rules. Perhaps the definition of “high pressure selling” needs to be tightened up. In any event, will the Government consider ways in which the public could more proactively report this kind of behaviour, enforcement could be made, and action could be taken when transgressions are found?
There is a trade body called the Association of Regulated Claims Management Companies, to which companies engaged in these activities can be affiliated. It offers a form of accreditation, unlike the Ministry of Justice, which simply registers companies and strikes them off if they transgress. The Motor Accident Solicitors Society has made the valid point to me that this is a complex area, and people often need help to make claims for legitimate injuries. It is entirely in the interest of good practice in the industry to weed out the bad people and ensure that they are removed. Can the noble Baroness say what sort of dealings the Government have with these trade bodies and how they might work more closely with them in the future?
Finally, will the Minister undertake to hold discussions with the Ministry of Justice to see how a higher profile might be given to how the public can deal with these issues? The MoJ website is highly factual, but does not go in for bold statements. Certainly, in this place, it is the personal injury sector which has been most complained about; however, it is actually the financial services sector which is really worrying the public. The financial services sector has less than a third of authorised businesses operating in this sphere, but it gets more than 90% of the complaints. Most of those complaints are about either cold calling or about up-front fees. As the noble Lord, Lord Kennedy, has already said, the MoJ report for last year records 3,213 authorised businesses in this field, an increase of 91 over the year. More than 1,000 were suspended or had surrendered their licences in some way.
This is clearly a sector in which there is a lot of churn. So while we absolutely need a robust regulatory framework, we also need real enforcement and bold public awareness campaigns about how to deal with claims management companies, right from that first call, through to the way that they use personal data and then on to the substance of how they conduct their business.
My Lords, I thank my noble friend Lord Kennedy of Southwark for securing this debate. I also congratulate him on his sustained interest in this subject and on pushing it; I am pleased that he has done so. I declare an interest as a non-executive director of the Financial Ombudsman Service.
Like other noble Lords, I have had the experience of being chased by claims management companies. Indeed, it is something which is raised almost every time I have a conversation with anybody in which financial services comes up. Most people express particular irritation about the marketing practices of claims management companies. There cannot be many people left in this country who have yet to have either a phone call or a message promising thousands of pounds for an accident they do not remember having or for a loan they do not remember taking out. However, in some circumstances it can be more than an irritation; these messages can create false hope for people who are struggling financially, at whom they are very often targeted. That is more than an irritation.
Concerns are expressed on all sides about this problem. Consumer groups are worried about the fact that individuals are paying significant sums to claims management companies for getting redress, when they could simply go directly to businesses and, if necessary, use the free ombudsman service. In turn, businesses are complaining that the costs of dealing with CMCs, especially if the claims are speculative or unfounded, are significant and can disrupt their attempts to resolve complaints.
However, there is always a question to be asked as to why claims management companies target a particular market. They do so because an opportunity has arisen. We need to remember that CMCs are flourishing in the financial services industry because of the widespread mis-selling of payment protection insurance by the banks over a long period. That mis-selling created consumer detriment on a significant scale. Provisioning is now up to some £9 billion in the banks. The failure of the banks to maintain the trust of consumers by handling complaints well, on the back of that, has created the opportunity into which claims management companies have stepped.
To give a sense of the scale of the problem, I asked the ombudsman service for some figures. It is now seeing record numbers of PPI complaints; 1,000 new complaints every day. It is finding in favour of consumers three times out of four. Some 60% of all the complaints received by the ombudsman last year were about PPI; more than 150,000 complaints.
In relation to the points made by both of the previous speakers, last year the ombudsman service dismissed more than 5,000 cases because there had not even been a PPI policy sold in the first place. Most of those claims were brought by claims management companies.
I understand that the proportion of cases coming through CMCs has fallen; it is hoped that consumer awareness is improving. But there is more to do. My noble friend Lord Kennedy gave a very good, clear description of the level of breach that is going on, and suggested some remedies. However, the picture is complicated, as he would understand. Some CMCs conduct their business in a perfectly responsible way; no doubt, they obtain redress for consumers who otherwise might not have known that they were owed money or know how to go about claiming it. Consumers should be entitled to make a choice to be represented, provided that they do so with sufficient information and understanding as to what they are getting into and a genuine understanding as to what the alternatives are.
What needs to be done? I offer the Minister three thoughts to take away. First, the Government need to act to encourage businesses and regulators to address the detriment in the first place. That way consumers can be involved in the process of securing redress and take away the opportunity for CMCs in the first place. Secondly, the Government need to focus on delivering effective regulation of CMCs so as to allow responsible CMCs to offer a service but discourage the others out of the market altogether. Effective regulation would need to tackle the kind of marketing practices described by my noble friend Lord Kennedy and the noble Baroness, Lady Scott. But we also need to make it clear that transparency on charging right at the very front of the process and enforcing rules on cold calling were there, so the consumer genuinely understands the costs.
Finally, I very much agree with my noble friend Lord Kennedy that the ideal opportunity has come to put in place an arrangement for dealing with complaints about CMCs by giving effect to the provisions that would pass responsibility to the Legal Services Ombudsman. I will be very interested in the Minister’s response to those points, as the time has come to do something about this problem. I hope that the Government can be encouraged to act now.
My Lords, I declare an interest as chair of the Consumer Credit Counselling Service, which has some involvement in this area. I start by thanking my noble friend Lord Kennedy for introducing this debate and for posing the question on how we get higher standards in this area. I also draw attention to the House that I am not the noble Lord, Lord Young of Norwood Green, if Members have an earlier version of the Speaker’s List. I am having to deputise for him, although I am slightly nervous about raising that issue in this place because it will be recorded that the noble Lord, Lord Young, was unfortunately struck down last night and was unable to be present today, which will probably result in a flood of calls along the lines of the suggestion from the noble Baroness, Lady Scott of Needham Market, that once these things get out they are pursued. In this case, I do not think that it is anything that he could possibly claim for—but you know the noble Lord, Lord Young.
It is extraordinary how the growth in claims management companies has risen since 2006, with the change in regulation. It was also interesting to note the rate of churn within those, which suggests that quite a lot of activity is going on below the radar. My noble friend Lord Kennedy made the point that some of the returns on the fees being charged here are astonishing, with up to 30% fees for work being done. It is perhaps overheating as a sector and may need further work and investigation by the Government.
My noble friend made a powerful call for action across a wide range of activities. He mentioned the generic question of fraud. One point that he did not make but which is also of concern relates to whiplash. A recent report in the papers said:
“The data show that nine of the 10 postal areas with the lowest number of whiplash compensation claims per head were in Scotland, where the legal system imposes stricter controls on referral fees. There were only three claims for every 1,000 residents in the Edinburgh and Dundee areas … compared with 22 in Liverpool and 21 in Uxbridge”.
As the claims director at Aviva said:
“I don’t believe people in Scotland have significantly stronger necks”.
In other words, there is a suggestion here that perhaps fraudulent work is at play, which is something that needs more investigation.
We also heard about the cold calling and how that seems to follow people around. Increasingly we have all had problems with text messages, e-mails and phishing expeditions on the PPI mainly, but not limited to that. There are also transgressions in the sector about how fees are charged to consumers who are vulnerable and unable to respond.
Having heard the points made by my noble friend and the noble Baroness, Lady Scott, and the expertise brought to this debate by my noble friend Lady Sherlock, I think that there are a number of points that the Government should think very hard about. The question was asked whether a voluntary code was the right way forward on this. In some ways, perhaps initially when businesses are starting up, a voluntary code is a good way of doing it. But as the sector matures and people begin to opt out or work round it, a statutory basis probably needs to be considered. I would be grateful for the Minister’s comments.
There is also the question of whether or not, perhaps in co-operation with the FOS, there should be a naming and shaming of defaulters and in some sense a penalty through payment. That is something that should be considered, with the maturity of the sector. There is also the important question of the TPS review, the role of the Information Commissioner and whether that should be reclassified so that it becomes a body that has ability to pursue those who default. Obviously, there is a question about overseas calls there.
The whole question of the PPI review seems to be peaking and beginning to come back. It is something that the Government might think about reviewing. It seemed to come from nowhere. We heard from my noble friend Lady Sherlock how and why that happened, but it does not really explain the long tail of activity that we are all seeing. It would be interesting to have a sense of that, and maybe the Government might look at reviewing that and give us a report on it in future.
Finally, at the heart of the debate, the question that my noble friend Lord Kennedy raised at the heart of his speech was what the role was of the MoJ in this sector. In some senses, we have reached the stage in this industry whereby strong and effective regulation—in bold, as some people said—is required. That does not lie happily with the Ministry of Justice as a sponsoring department. The Government might think of the opportunities that present themselves through the Financial Services Bill, shortly due in your Lordships’ House, in which a number of bodies are being given new regulatory authority and duties. It seems odd that this particular sector of the financial industry is not part of that, and there might be an opportunity to discuss further with Ministers whether they could receive an amendment on that issue.
My Lords, I begin by thanking the noble Lord, Lord Kennedy, for giving us this opportunity to debate such a topical subject. I thank the noble Lord and other noble Lords for their constructive contributions. I would also like to congratulate him on his dedication and commitment towards highlighting the serious issues that concern consumers. I am very pleased that the meeting that he had with my noble friend Lord McNally at the MoJ resulted in a satisfactory outcome. Of course, we are minded that the protection of consumers using the services of claims management companies is clearly an extremely important matter, as is the efficient handling of consumers’ claims. Much has been done to drive out bad practice in the claims industry, and we are committed to doing more. I am very pleased, therefore, to inform your Lordships’ House what action we are taking in this area and I hope to touch on some of the areas of concern that noble Lords have raised today.
It may be helpful if I first set out the existing conduct rules which claims companies must follow. The rules focus on consumer protection and require companies to give consumers clear, honest and comprehensive information about the options available for pursuing their claim, including self-help, and the associated costs and risks involved. The intention is that consumers should always be in a position to make an informed choice—an issue that was raised across the House. There must be no high-pressure selling, no hidden charges and no misleading marketing. All claims companies must have a complaints procedure to deal with any customer problems. Companies that breach these rules will face investigation and firm enforcement action, which can range from warnings to restrictions being added to their licence and ultimately suspension or cancellation of their licence.
Substantial progress has been made since the claims management regulation regime was introduced in 2007. Practices such as misleading advertising and marketing, and hidden costs, have been targeted and greatly reduced. Cold calling in person and unauthorised marketing in hospitals have been eliminated, unfair contract terms have been removed, and complaints handling has been improved. To date, the unit has removed the licences of more than 700 claims management companies, suspended or imposed restrictions on their licences and threatened many more with such action. As my noble friend Lord McNally stated in response to a recent Parliamentary Question from the noble Lord, Lord Kennedy, 260 claims management companies lost their licences between April 2011 and March 2012. There will be no let up by this Government in going forward. We realise and recognise that more must be done to tighten up practices. Therefore, we are developing proposals to amend the conduct rules for claims companies and a public consultation is planned for the summer. I hope that noble Lords will assist in that consultation.
The Government are committed to taking a robust approach to tackling those companies that appear to be involved in malpractice right across all sectors of the industry. As noble Lords have highlighted, the practices of some claims companies operating in the payment protection insurance claims sector have been a cause for concern. This sector continues to present challenges for us, and, of course, we recognise that there is much more to be done. However, we cannot ignore the progress that has been made by the Claims Management Regulation Unit in ensuring that claims companies remain compliant. The unit has established a specialist compliance team to focus on tackling the poor practices used by some companies when presenting claims for mis-sold PPI. Since its inception in November last year, the compliance team has already conducted more than 50 audits, issued seven warnings and taken other forms of enforcement action where problems have been found. This work continues and includes targeting those companies submitting claims where no PPI sale exists, those charging upfront fees and those operating call centres to ensure that sales calls are compliant.
The unit is working with the Financial Ombudsman Service, the Financial Services Authority, major banks and credit card providers to help identify non-compliant companies and improve the claims process for consumers. The unit is also encouraging the development of mechanisms for improving the banks’ relationships with compliant claims companies. The intention is to help streamline the PPI claims process for consumers who choose to use them and minimise the burden on the banks. Last year, the unit issued joint guidance with the Financial Services Authority and the Financial Ombudsman Service on best practice when handling claims for mis-sold PPI. The unit produced guidance for consumers, advising them to shop around for the best deal and never to pay an advance fee or agree a verbal contract without seeing the offer in writing first. The guidance also makes consumers aware that there are self-help alternatives to using a paid representative to make a PPI claim.
The Information Commissioner’s Office is aware of issues in relation to claims and unsolicited marketing and believes that the existing legislation and regulatory environment are adequate in seeking to protect individuals from all such kinds of marketing, not merely those related to claims services. However, I very much take on board the concerns that have been raised and I and my officials will take them back to the department. The Information Commissioner’s Office is responsible for enforcing the Privacy and Electronic Communications Regulations 2003, which protect consumers from unsolicited text messages and marketing calls. It has a significant suite of powers with which to investigate and take enforcement action where the regulations have been breached. These include the power to issue a monetary penalty of up to £500,000 and to require communications service providers to disclose the identity of third-party users of their networks. The Information Commissioner is putting more resources into tackling this problem and we are providing assistance as necessary. The Ministry of Justice’s Claims Management Regulation Unit has formed an effective working relationship with the Information Commissioner that enables a fruitful exchange of intelligence. Both regulators are now seeking to build on this by establishing a memorandum of understanding, which will set out a basis for sharing information and intelligence to help them carry out their regulatory functions. This should be finalised soon.
The Claims Management Regulation Unit is already investigating individual claims companies believed to be involved in commissioning and receiving the leads generated from text messages and automated calls. The main investigation challenge is identifying who is responsible for the texts and building up sufficient evidence of abuses to take enforcement action. Unsolicited texts and marketing calls can be made by a range of companies, as my noble friend Lady Scott highlighted, some of which are based overseas. These include lead generation companies, data companies and illegitimate companies. The Information Commissioner and the Claims Management Regulation Unit are members of a cross-regulator and industry working group established to pool resources, share intelligence and mount a more effective campaign of joined-up action to try to eradicate unsolicited text messages and automated calls. Other members of the working group include Ofcom, the Office of Fair Trading, the Direct Marketing Association and the mobile marketing industry, including network operators.
I hope noble Lords are reassured that there already exists a robust regulatory environment to deal with this problem. However, I acknowledge their concerns about the fees charged by claims management companies. Transparency is a key requirement of the conduct rules which all claims companies are required to follow. Their fee structure should be clear, transparent, fair and not misleading. Reasonable inquiries should be made as to whether prospective clients have alternative means for pursuing a claim and claims should be pursued only where it is in the interests of the client to do so. While most claims management companies do not charge upfront fees, those that do must provide the key facts in writing.
In conclusion, I have outlined some of the main actions we have taken and our commitments going forward to driving out bad practice across the claims industry. I hope these reflect the Government’s determination to ensure that the regulatory burden placed on claims management companies continues to be effective in protecting consumers. My noble friend Lady Scott asked about trade bodies representing claims companies. The Claims Management Regulation Unit in the MoJ has considerable contact with trade bodies representing claims companies. We will continue to work closely with them to raise standards. The noble Lord, Lord Kennedy, referred to training. I will take back that interesting thought because there is merit in seeing consistency across the sector. My noble friend asked about further discussions with the MoJ. I am very happy to take that back to the MoJ to see whether a meeting can be set up with noble Lords who are interested in this issue.
As the challenges get harder, the importance of effective joined-up approaches and enforcement operations cannot be stressed enough to ensure that not only are more claims management companies operating in the consumers’ interest, but that all others involved in the claims chain are too. If I have missed any questions that were asked by noble Lords, I will be happy to write to them. I would like to put on record that we wish the noble Lord, Lord Young, a speedy recovery and very much hope that he is not bombarded with unsolicited messages.