Why to avoid claims management companies

By Emma Lunn

You may have gotten texts, phone calls and emails relating this tempting message: "If you've taken out a loan or credit card in the last six years, your bank could owe you money."

The same message has also been the subject of TV adverts, billboard posters and radio jingles.

These adverts are from claims management companies (CMCs) -- firms that say they can get you a refund cheque from your bank or building society if you were sold useless payment protection insurance. But what the adverts don't tell you is that claims management companies don't do anything you can't do yourself -- and that they'll take a chunk of the money that should go in your pocket.

What are claims management companies?
Claims management companies promise to help consumers go after financial service firms (like banks and insurance companies) that treated them unfairly. Lately, one of their most popular targets has been a product called payment protection insurance (PPI). claims-management

PPI is designed to step in to pay your loans and credit card minimum payments when you can't -- because you're unable to work, for example. However, PPI policies are routinely mis-sold to borrowers who didn't want or need the insurance, or who would never be able to make a claim on it (because of a pre-existing health condition, for example).

After a press campaign spearheaded by several consumer groups, PPI has become one of the biggest mis-selling scandals the banking industry has seen.

And that scandal has given claims management companies the opportunity to prey on cardholders who have already been preyed on, promising them their firm can help them get back the money they spent on premiums for useless PPI.

What's the problem with claims management companies?
There's nothing illegal about having a third-party service file a complaint about PPI for you. Yet claims management companies have been accused of misleading consumers into thinking they are entitled to compensation and then burdening both banks and the Financial Ombudsman Service (an independent organisation that can re-visit an unresolved complaint) with time-consuming investigations.

Claims management firms often claim that using "specialists," like themselves, will increase the chances of a successful outcome -- but there's no evidence to support such claims. To make matters worse, using a claims management company will certainly mean you get less money back if your claim is successful, as the firm takes a cut, usually 25% of the claim amount. Recent research by Which? found that a quarter of people didn't know that claims management companies deducted a fee, and that only half knew using a claims management firm would not necessarily increase the chance of a successful claim.

Another factor is that the increasing number of bogus and spurious claims by these firms has increased costs for banks -- and therefore consumers. The Building Societies Association (BSA) found that bogus claims for mis-sold PPI made by claims management companies to mutual lenders grew significantly between January and May 2012, up by 247% in the previous six months.

Claims management companies have become such a nuisance that the government announced in August that it is instituting a crack-down on the industry that goes into effect in 2013. Consumers will be able to complain about claims management firms to the Legal Ombudsman (an independent group empowered by Parliament to resolve legal complaints). If their complaints are successful, the claims management company involved will have to pay compensation.

How to do it yourself
Given the controversy surrounding the claims management industry, it's best to make mis-sold PPI claims yourself. In fact, the company you complain to will treat your claim the same way it would a claim from a third party. Moreover, the information you would need to submit to your bank or the Financial Ombudsman is the same information you would give to the claims management firm -- so there's no extra work involved.  

"I would say to any consumer who did buy such a product ... and believes that it was mis-sold to go direct to their provider to complain," says Adrian Coles, director general of the BSA. "There is no need to go through one of these companies and sacrifice 25% or more of the compensation from a successful complaint."

Still, according to Which?, banks that sell PPI could do much to make the complaints process easier for consumers.

"The banks must make it straightforward for people to reclaim PPI themselves, for free, so they don't resort to expensive and unnecessary claims management companies," said Which? Chief Executive Peter Vicary-Smith in a statement. The Financial Ombudsman Service has some useful advice about PPI claims on its website that can help consumers make a claim directly. It breaks down the process into two basic steps:

  1. First, complain to the bank or insurance company that sold you PPI. It has eight weeks to look into your problem. To increase the chance your claim will be taken seriously, try to go through the person who originally sold you PPI. If possible, submit your complaint in writing to establish a record. Stay calm and polite, and save all paperwork.
  2. If you're not happy with the resolution after eight weeks, it's time to call in the Financial Ombudsman. You'll need to submit a complaint form (it's the same one a claims management company would use). In addition to describing your complaint, you'll need to provide the date you bought PPI and the date you first complained to the company that sold it to you. You'll also need to include copies of the paperwork you received from that company.

If the Financial Ombudsman decides to take on your claim, it will negotiate with your financial institution to find a resolution (a process that can take up to nine months). That's a long time to wait -- but, because the Ombudsman does not charge a fee, your entire settlement will go to you.

See related: Understanding your credit card contract: A 5-step guide to the small print, Section 75 and what it can do for you

Published: 30 October 2012