Schedule 11 - The financial ombudsman service

Financial Services Bill – in a Public Bill Committee at 10:00 am on 15th March 2012.

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Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 10:00 am, 15th March 2012

I beg to move amendment 191, in schedule 11, page 241, line 8, at end insert—

‘In section 234(1), after “or any class of authorised person”, insert “or any claims management company authorised under the Compensation Act 2006.”’.

This topical amendment relating to the Financial Ombudsman Service looks at extending regulation to claims management companies. I mentioned earlier that the payment protection insurance mis-selling crisis has had a big impact on the FOS; it has also created an industry. A large number of organisations and claims management companies have stepped into the market as mediators to facilitate the complaints process.

Yesterday, while I was recovering from a slight bout of food poisoning, courtesy of the House of Commons dining room, I spent no more than an hour watching daytime television, which is not something I do very frequently. One of the strange things about daytime television, apart from the fact that there is not a lot on, is that the advertising breaks are filled entirely with adverts urging customers to ring claims management companies. It is absolutely astonishing. I had no idea that that happened, so in some ways, I pay tribute to the House of Commons dining room for facilitating my experience of daytime television, and for opening my eyes to what is happening.

Photo of Fabian Hamilton Fabian Hamilton Labour, Leeds North East

You wouldn’t want to do it again.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 10:15 am, 15th March 2012

I would not, but I had my eyes opened to the phenomenon of push advertising, encouraging and luring people to use claims management companies. Several organisations, particularly building societies, contacted us when we were preparing for the Bill and said that claims management arrangements had a considerable impact on their business. They do not in any way wish to deny customers a legitimate return of their money or compensation, but they have serious concerns about whether customers are doing the right thing and getting good value by using claims management companies.

Customers are lured into using the companies in several ways. There is a phenomenal amount of cold calling, text messages, pre-recorded telephone calls, and TV and radio advertising. Companies buy lists of contracts from brokers and so on. The claims management companies, armed with the knowledge that there is possibly a relationship between certain customers and certain firms, pile a load of complaints, through pro forma arrangements, on to those firms, sometimes at significant cost to the customer; 25%, 35% or 40% of compensation sums are taken in fees by the claims management companies.

Photo of Lorely Burt Lorely Burt Chair of the Liberal Democrat Parliamentary Party

I am totally with the hon. Gentleman on some of the techniques used by claims management companies, although I am not entirely with him on his taste for daytime television. Obviously, claims management companies need strong and proper regulation, but why should that come under financial services, as opposed to other forms of services? Why the need for financial services regulation to control properly the activities of some companies?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

That is a good question. Perhaps it is one of those areas that falls under the Office of Fair Trading, or is covered in the same way as other practices. The volume of claims management involvement in financial services has been such that it would be peculiar if we set up a consumer champion called the Financial Conduct Authority that did not in some way have a locus when it came to aspects of consumer activity that clearly take up a great chunk of the public’s interest, in relation to financial services complaints and redress. It is important that the Government take action on some of the arrangements. I understand that there is a prospect of a ban on referral fees in personal injury cases, but the non-sales problem in financial services is likely to increase unless strong action is taken to deal with those claims management companies that indulge in nefarious or less desirable activities; I accept that that is not necessarily all claims management companies.

I want to get a sense of the Minister’s feelings on the subject. Is he content with the current arrangement? Is he happy with the status quo? I hope that he thinks that action must be taken to rein in the business models of some claims management companies. I understand that many of those companies throw hundreds of claims, about which there is often little information—there is often very little work involved—to the firms concerned, and leave it to the Financial Ombudsman Service and the firms to weed out the claims that do not apply.

One building society recently told the Building Societies Association that in the past six months it has had to increase its PPI provision by £15 million, of which £10 million is for the cost of processing claims from people who never bought a product from the building society in the first place. The increase was not for consumer redress; it was simply to field inappropriate claims from claims management companies. Everyone accepts that money ought to be put aside by the banks and building societies for proper compensation where it is due, but I worry that vexatious administrative costs will eventually fall on the shoulders of ordinary customers. We need to ensure that does not happen.

I have printed the standard, pro-forma document on how to complain about PPI from the Financial Ombudsman Service website. The form is significant, so I am not surprised that some people just ring a claims management company. There is a point about being put off by the number of questions, and leaving it to other organisations to do the form-filling. Has the Minister looked at the ombudsman’s scheme and judged whether the free service on the public’s behalf could be advertised and made more widely known, so that ordinary customers recognise that they have a choice between going through a claims management company, which will take a considerable slug of any compensation, and pursuing the complaint directly through a free service?

I would be grateful if the Minister could address those points. He will understand why we have drafted the amendment in such a way. The problem is serious and needs attention.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

This is our third discussion on CMCs during our consideration of the Bill, and I have already put on record the work that we and the Ministry of Justice are doing to address the issue.

Going back to what the hon. Gentleman said in the stand part debate, 78% of people are aware of the FOS. They know that there is a free dispute resolution process out there. Some people may want to use a claims management company, but there are checks in place. The claims management regulator is carefully considering the way in which claims management companies address PPI claims.

We are caught in a dilemma. On the one hand, the hon. Gentleman says that a building society has put aside £10 million to process possibly spurious claims; on the other hand, we have a longish questionnaire. Someone has to bear the costs somewhere, and the more information that consumers provide to help expedite the claim process, the better. Having a form that provides evidence that a policy has been bought is helpful.

I raised the matter with the FOS. Banks, building societies and, indeed, the FOS are able to push back on CMCs and ask for more information. CMCs should not be on fishing trips. There is merit in banks and building societies taking a much more proactive role in pushing back on CMCs and asking them to get the information required to judge whether a claim is necessary, rather than leaving it to the bank or building society. The cost of erroneous claims is borne by their customers. Yes, banks and building societies need to pay their fair share of the cost of addressing PPI mis-selling, but they should not be paying the cost of vexatious claims. That cost should be squarely and firmly put on the shoulders of CMCs, and the banks and building societies should push back on that.

The balance is about right, but the banks and building societies need to take a much more assertive approach to pushing the onus on to CMCs. If consumers wish to use CMCs, they need to understand the costs. CMCs need to be transparent about the costs, but let us remind our constituents that the FOS is there and it is free.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I hear the Minister’s points. The issue is important and needs to be raised. I am concerned that there is insufficient regulatory ambit in the claims management procedures. I know the Ministry of Justice is considering these questions.

The Chair adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at One o’clock.