Calls to curtail professional compensation claims

The role of claims management companies (CMCs) has come under fire from the industry, regulators and consumer advocates, amid widespread concerns that indiscriminate applications for compensation are fuelling a spike in consumer auto finance claims which risks overwhelming lenders and creating market instability.

Since the FCA announced its review of discretionary commission arrangements (DCAs) within the motor finance sector at the beginning of the year, the number of auto-related claims sent to the Financial Ombudsman Service (FOS) has increased significantly, with numbers soaring even higher following the recent Court of Appeal decision concerning wider commission disclosure and consumer consent issues in three FOS cases.

Darren Smith, managing director of Bradford-based CMC, Courmacs Legal, for example, suggested lenders could face “30 million to 40 million” claims over mis-sold car finance in the wake of the latest judgment.

Courmacs stated it already had around 1.4m claims on its books, largely relating to the FCA DCA inquiry, while a representative of Bott and Co, another CMC, estimated the firm had around 75,000 motor finance claims which could cost in excess of £100 million if the Court of Appeal ruling is upheld.

The Financial Conduct Authority (FCA) and the Financial Ombudsman Service (FOS) have published a Call for Input on modernising the redress system, which makes specific reference to the rise of what the regulator dubs “mass redress events”, driven by CMC activity.

The consultation paper notes: “There have been several significant mass redress events in the last few years, and we have heard the concerns raised about their impact. In particular, the impact on users of financial services who have lost out, and the uncertainty created for firms, their investors/shareholders and other stakeholders, in turn having a potential knock‑on impact on growth, innovation and investment.

Outcomes

However, FOS has long made clear that it has concerns about CMC activities. In its most recent data, the service said it received 74,645 new complaints about financial products and services between April and June 2024, compared to 43,953 reported in the same period the previous year.

Of these, professional representatives (PRs) including CMCs now account for around half of the complaints received, compared to just 17% reported in the first three months of 2023/24.

However, only 25% of cases brought by  PRs over the period were found in favour of consumers, compared to 40% of cases referred directly by consumers for free.  In addition, PRs and CMCs take a large proportion of any compensation, with FOS finding a 30% cut was not unusual.

Moreover, FOS points to the potential for mass claims to overwhelm regulators and industry, causing further disruption which is not in the consumer interest, saying: “We are finding that in a substantial proportion of these cases the matter is being withdrawn or abandoned by the complainant and/or their professional representative or the matter is not determined in favour of the complainant.”

Overhead

But even if a complaint is withdrawn, there is still the administrative overhead to consider. The Call for Input states: “If mass redress events involve sudden and unexpected increases in complaints, this creates operational difficulties for both firms and the Financial Ombudsman. In some cases, such events can go as far as resulting in disorderly firm failures, with the cost of this either generally absorbed by the rest of the industry through the FSCS levy or, if there is no FSCS cover, by consumers in lost redress.”

Courmacs Legal has recently complained that it is now receiving post “by the truckload” from Lloyds Bank relating to claims against its Black Horse auto finance arm, with 200,000 letters delivered last week alone.

A Black Horse spokesman said: “We are required to acknowledge every complaint that we receive. Currently, the best way to do this quickly is to issue a letter back to the claims management company, so it can be easily forwarded on.

“However, we always recommend that customers contact us directly via our website, where they will find all the information they need to raise a complaint with us directly.”

Response

The FCA has responded with a proposal to extend further the deadline for complaints to be made to lenders on non-DCA agreements, but there are growing signs of disquiet with the levels of CMC activity.

FOS is to go ahead with plans to implement a £250 case fee that will be payable by CMCs and other PRs upon referral of the complaint to the service. If the outcome of the case is in favour of the CMC or PR, then a £175 reimbursement of £175 will be payable.

Meanwhile, consumer rights advocates have also started to ask questions about a system designed to help consumers make legitimate claims without any costs to themselves, but  which appears to have been hijacked by CMCs.

In February Martin Lewis, founder of MoneySavingExpert.com published a car finance reclaim tool, which prompted over 1,080,000 car finance complaint letters in the first month.

Now, writing on X, Lewis stated: “I find it more difficult to see the unfairness and that redress is due on car finance firms with fixed commission that were following regulators’ guidelines.”

Lewis described moving to a model of car finance reclaims where payment of any commission if the amount was not known should automatically trigger a redress  as “a push even for me”, warning this could be “counterproductive to consumers as it is a potentially existential threat to the consumer lending and could both mean less availability and higher costs in future.”

Similarly, Sunday Times consumer journalist Johanna Noble advised readers: “While it is right that the car finance industry should be held accountable for mis-selling, it is pure greed to jump on the claims bandwagon if you were happy with your deal. Just because you can make a claim, it doesn’t mean you should.

“If you do, you might be quids in now, but remember that you will pay for it in the long run when you won’t be able to take out another finance deal for a shiny new car or you find that car prices have gone up even higher to cover that compensation bill.”

“At the Asset Finance Connect autumn conference Stephen Haddrill, FLA director general, and Jim Higginbotham, NACFB CEO, will be joining a panel of industry experts to examine the issues and consider a way forward which works for lenders, brokers and consumers.”

For more details and to book your place visit the AFC conference website or email Louise Clavey at louiseclavey@assetfinanceconnect.com