With claims firms recruiting mortgage brokers on a weekly basis, some brokers risk going from being lenders’ best friends to their worst enemies. Traditionally, brokers have jumped when lenders say jump and then sat obediently waiting for the next round of commissions. But when times are tough and commissions start to dry up the relationship is brought into question.
Some brokers are starting to question whether their loyalties should remain with lenders that are failing to deliver. And with the Ministry of Justice receiving some 150 applications a month from companies wishing to become claims management firms, the dilemma for brokers does not look set to disappear anytime soon.
The MoJ is responsible for issuing claims firms with licences and has already authorised around 800 businesses to provide claims management services in the financial services sector.
“It does not surprise me that the MoJ is receiving this number of applications,” says Mal McConechy, who launched Liverpool-based Loan Resolutions last year, specialising in complaints relating to the Consumer Credit Act. “In a few years’ time everyone will know somebody who has made a claim.”
But he says a lot of firms are jumping on the bandwagon thinking they can make a profit from claims management and worries whether the MoJ will be able to cope with demand.
“One of my concerns about the MoJ getting all these applications is that it will make it hard for it to police the sector,” he says.
Before working in claims management McConechy was a director at network Home of Choice – ironic considering that a number of networks have shunned claims firms recently.
“I spent a lot of years in the mortgage market but now I doubt I will be able to find a job working in the sector because of the way the market is,” says McConechy. “Claims management is a market I can make money in.”
It has been brought into question whether brokers should take from lenders with one hand and make claims against them with the other, with some accusing brokers that enter the sector of biting the hand that feeds them.
Brokers’ revenues are limited in the current climate and many are finding the lure of claims management firms too much to resist but McConechy believes claims firms will never become part of a brokers’ mainstream offerings until the scepticism around them has disappeared.
“I cannot envisage the day when lenders accept claims firms,” he says. “The problem is that successful cases are never made public. A lot of individuals have won claims against lenders and had their debts wiped off but these have not been publicised. When more consumers start winning claims they will grow in popularity – many will hear from friends about how they have been successful.”
It has not escaped the MoJ’s attention that some claims firms are coming down hard on lenders for deceiving the public while themselves not sticking by the rules. The MoJ has issued guidance to firms and warned that misleading statements in advertisements that make dubious claims or leave out important information might breach consumer protection regulations.
Image is everything and claims firms do not always have the best public profile. McConechy says it does not help that these firms operate in various ways and some charge extortionate upfront fees.
“Some firms charge upfront fees of up to £1,000 and brokers only end up with a small cut of that,” he says.
He warns brokers to check how much companies will charge before enrolling with them and warns that if a deal looks too good to be true, it probably is.
Whenever a new product or scheme is launched into the mortgage sector it invigorates the entrepreneurial side of all those in the industry. In the current climate, if firms think they can make money from the latest trend they are likely to have a go.
One intermediary who did not wish to be named entered the claims management sector a number of months ago, only to find himself coming up against a brick wall.
“There are three stages to the claims management process,” he says. “The first stage is for the claims company to admit a loan is unenforceable, the second is to get a solicitor and the third is to get the lender involved to admit it.”
Despite his best efforts he says he often cannot get confirmation from lenders that debts have been written off, leading to consumers thinking their debt is no longer valid but lenders still demanding loans are paid back. The way claims management is advertised could have something to do with this.
Lee Lipson, legal services director at Credit Issues, says brokers should choose firms with on-site specialist legal teams and pub-lished details of successful cases.
“It’s important for brokers to do their homework when looking to instruct claims firms,” he says. “They should look for evidence of previous successful cases and ensure the companies involved have specialist teams that are devoted to the area of claims management.”
Publishing successful claims management stories is easier said than done, with many lenders making sure their backs are well and truly covered when it comes to clients revealing details of their victories. Lenders will try to avoid going to court at all costs, with many wanting to avoid setting precedents. Also, they don’t want to create adverse publicity for themselves and show consumers how easily money can be claimed back.
Carl Wright, director of Cartel Client Review says if firms trying to enter the market are not successful it is down to resources rather than lenders not wanting to admit their mistakes.
“We have an expert panel of solicitors and barristers – it’s impossible for just anyone to turn up and be successful in this market,” says Wright.
Cartel considers complaints relating to mortgages, secured loans, car finance, credit cards and unsecured loans. But Wright is reluctant to reveal specifics about how he has won claims for clients. With so much competition in the sector he says firms that are successful do not want to give others a helping hand.
Wright believes lenders will eventually have to accept the existence of claims management firms and also that those networks that do not embrace them will not win favour with their members.
“There’s an opportunity for appointed representatives to make money and networks should be looking out for their ARs rather than lenders,” says Wright.
A number of networks are understood to have told their members in no uncertain terms that they do not condone the use of claims firms. This could be down to a fear that such firms might eventually halt new lending from lenders as their funds are taken up by paying claims. Wright dismisses this worry and describes the amount lenders are paying out as a pinprick on their balance sheets.
“The debt management industry has more of an impact on lenders’ books than claims management,” says Wright. “And yet networks don’t seem to have a problem doing business with debt management firms.”
Intrinsic is one of the networks that does not offer claims management as part of its proposition.
“Our members are with us for the financial proposition we promote and provide,” says George Higginson, managing director of commercial development at Intrinsic. “Claims management is not part of our proposition. We say if advisers want to be involved in that it’s got to be independent from us. It’s not covered under the terms of our regulatory status and neither is it covered under our professional indemnity insurance.
“If brokers want to do claims management they must do it correctly and obtain independent cover.”
It’s not just an issue of regulation. For many networks, it’s also a question of whether it is morally right to go after the same lenders that provide their income.
“We don’t believe it’s appropriate that as a financial services network selling products for major lenders we should initiate claims against them – that’s a bit hard to swallow,” says Higginson. “If you speak to any adviser at the moment you will find the one thing they want is for lenders to be strong and able to provide funds to lend to clients. I’m confused about how suing those lenders is going to help in that regard.”
Lenders have yet to go on record as saying they will stop doing business with brokers or networks because they also facilitate claims management services but it’s obvious they are not overjoyed about paying brokers’ commission with one hand and paying out for claims with the other.
Mortgage Next is one of a number of networks that have advised members to be wary when considering working with claims firms. Gemma Harle, managing director of the network, warned brokers at a recent conference to think carefully before going down this road.
“Some brokers seem to see claims business as a good source of income but not only is this a case of biting the hand that feeds them, they should also ask whether it’s worth risking the wrath of clients they are seeking to help if it all goes wrong,” says Harle.
“Clients will grasp at any straw to help them out of their current situation but even successful financial claims can take a long time to be processed. Brokers should not regard claims as a crock of gold because they’re not.”
Networks are in a no-win situation. If they go against lenders they risk losing exclusive deals or business but if an increasing number of their members want to do claims management they may have to reconsider their position.
“We do not recommend this service at the moment although I’m aware that some channels do,” says Sally Laker, managing director of Mortgage Intelligence. “While I appreciate that in this market it may be a route some brokers wish to take, we are not rushing into promoting it. But we are keeping a watching brief on the process and fee structure, and listening to feedback.”
So whether mortgage networks find there is high demand among their members remains to be seen.
Mike Fitzgerald, sales director of Brentchase Financial Services, says there may be money to made but he has no plans to go down the claims management route.
“The prevalence of claims management firms is a sign of the ways things are in this country,” he says. “This is a nanny state and everyone is looking to make money out of everyone else.
“Things are bad at the moment for brokers but they will get better. I’m a professional broker and I don’t intend to go into claims management. I recently had an individual come in with £100,000 worth of credit card debt. He asked me if he could apply to write it off. I said he probably could but told him that he had spent the money and no doubt enjoyed doing so, so he should grow up and pay his debts.”
The demand for claims management services from consumers shows no sign of letting up. As debt grows, borrowers are searching for a way to get out of it quickly and are being enticed by claims firms’ promises to write it off.
There are attempts to crack down on these kind of firms and the MoJ has sent a stark warning to companies advising them against false advertising.
Justice minister Bridget Prentice recently warned that mis-leading claims firms could face enforcement action. Statements considered to be misleading include ‘80% of credit agreements are unenforceable’, ’50 million credit agreements are created every year of which at least 25 million are unenforceable’ and ‘we are currently handling over 5,000 cases’.
Prentice says statements in adverts that make dubious claims or leave out important information could breach consumer protection regulations.
“We urge anyone who is considering using a business offering such services to think carefully and seek independent advice before making any decisions,” she says.
The MoJ recently issued guidance for claims companies which has been backed up by the Office of Fair Trading.
“The OFT will not hesitate to take enforcement action against licensed claims businesses that engage in unfair business practices by deliberately misleading vulnerable consumers about the services they offer,” says Ray Watson, director of consumer credit at the OFT.
“Businesses should also be aware that if they offer debt counselling or debt adjusting services without holding an app-ropriate licence they will be committing a criminal offence and risk prosecution, and that any agreements they enter into with consumers while unlicensed may be unenforceable.”
One of the areas where claims companies are seeing most success is in payment protection insurance mis-selling. The Financial Ombudsman Service recently revealed that it is upholding 90% of cases made against firms for the mis-selling of PPI, and handling more than 800 complaints a week on the subject. With one unnamed company it is upholding 100% of complaints.
These complaints are starting to dent lenders’ and brokers’ profitability. Magic Loans, a secured loans master broker, recently went into liquidation, in part blaming PPI complaints. It says although the main catalyst for its demise was the withdrawal of lender Cattles, PPI complaints would have drowned any profit it made.
The buzz word is diversification, with brokers having rammed down their throats the idea that they must diversify to survive. But will claims management prove to be a step too far? In 10 years’ time claims management could become as familiar to brokers as insurance selling and buy-to-let mortgages or it could have led to a deterioration in the relationship between lenders and brokers.
It’s not for everyone and the sector has a long way to go before it is accepted by a lot of brokers, but if they continue to see their in-come falling they may soon not have the luxury of overlooking claims management.
Avoiding the regulatory gap with claims management
Despite the introduction of regulation in the sector in 2007 by the Ministry of Justice, the Association of Mortgage Intermediaries and its members still have concerns about the operations of some claims management companies and whether the services such firms provide bring tangible benefits to customers.
In the current climate vulnerable customers need solutions to their problems so prompt and fair handling of complaints is vital, not only as a fundamental part of the Financial Services Authority’s regulatory regime but also as a way of protecting the reputation of – and confidence in – companies in the financial sector generally.
Therefore, it is important for regulated firms to be aware of the sort of issues that can arise when dealing with complaints.
The concern for us and our members is the regulatory gap which allows claims firms to provide quasi-legal or financial advice with limited checks and controls. Concerns about the possible risks they pose to customers – and, to a certain extent, brokers – has generated a debate over the need for a regulatory structure that assesses the competence of claims firms, authorises them and monitors their conduct.
With the downturn in the economic climate we have seen a marked increase in the number of contacts made by claims firms with the broker community. Claims companies are now seeking to recruit advisers, offering training in complaints handling or to make them franchisees in MoJ-authorised firms or introducers. While broker firms may wish to undertake training in any number of areas as part of wider diversification plans, some of these claims organisations do not offer solutions that are of genuine value.
The issue for intermediaries and distributors surrounds their scattergun approach, which involves purchasing or obtaining clients’ details and then sending out all-encompassing letters mentioning areas such as payment protection insurance, the Consumer Credit Act and anything else they think could possibly generate complaints.
This affects the validity and perceived integrity of claims firms with brokers and other parties. But while recognising this, it’s important to say that not all claims firms operate this way.
While claims firms might suggest that customers could avoid their liabilities under unsecured credit arrangements there could be unintended consequences.
If these are properly incurred debts, attempting to avoid them through a legal loophole could result in subsequent additional costs for customers.
Also, it’s unlikely that firms looking for leads in this area will limit their scope to unenforceable credit agreements.
We don’t want to see consumers being encouraged to make claims that could be spurious. This wastes time for the industry and, more importantly, for customers.
The Financial Ombudsman Service will consider any unresolved complaints at no cost to customers so recommending a fee-charging option without informing clients of the alternative would not represent good advice.
Association of Mortgage Intermediaries
A duty of care to clients
In the past two years we have been at the forefront of a dynamic emerging market in the financial services world. This market has caused a wave of excitement among brokers, independent financial advisers and lenders.
The mortgage intermediary market is on its knees and lenders are determined to polish it off with tactics such as dual pricing. Such actions by lenders are greeted with alarm by intermediaries at a time when their survival is at stake. The claims management services offered by companies such as ours offer a lifeline. Claims management is the right product in the present uncertain economic environment.
But we must nurture this market through its early years, especially as some unscrupulous companies in the field have attracted the attention of the Ministry of Justice and the Office of Fair Trading as a result of their misleading promises to consumers. Thankfully, the MoJ and OFT have issued a joint statement declaring their intention to close such firms.
While this market offers intermediaries a new world of services and enables them to fulfil their duty of care to clients, the broker community has to combat a serious conflict of interest.
Mortgage networks are trying to stay afloat and avoid falling into administration. Central to their survival is maintaining their relationships with lenders. This has recently been laid bare in letters being sent out to intermediaries by several networks, pleading with them not to offer claims management services to their clients. This tactic is particularly outrageous considering that some brokers have not been paid their commissions by networks for up to four months.
Brokers are not stupid. They know that their first allegiance is to their clients, not to networks and not to lenders. If their clients are entitled to make claims and seek redress, brokers will seek to assist them. They will not be intimidated by any tactics used by networks or lenders to persuade them otherwise.
And as many networks disappear from the financial services landscape in the coming months they may wonder why they didn’t adapt to the changing market instead of marching to the beat of the dinosaurs.
It is important for intermediaries entering this market to understand that claims management and debt management are different solutions to different problems. Claims management should not be seen as a solution to debt problems. Both sectors are here to stay and will be accommodated within the broker market.
The lack of mortgage products has created a huge void for intermediaries and claims management is filling this. The genie is out of the bottle and it can’t be put back so ensure you fulfil your duty of care to your clients.
Cartel Client Review
No more misleading marketing
The Ministry of Justice has been responsible for the regulation of the claims management sector since April 2007. Any business providing claims management services to individuals making claims for compensation must be authorised. The Compensation Act 2006 provides a statutory framework for regulation.
Regulation was introduced following reports identifying concerns that claims firms were misleading consumers about funding options, providing poor quality advice, using aggressive marketing techniques and encouraging frivolous claims.
Around 2,500 claims businesses have since been authorised by us. Our monitoring and compliance unit ensures the activities of these businesses comply with our rules, deals with complaints and takes appropriate enforcement action against businesses that break the rules.
Serious breaches of the rules can lead to firms having their authorisation suspended or cancelled – and trading without authorisation is a criminal offence.
Around 800 businesses have been authorised to provide claims management services in the financial services sector. Originally centred on endowment mis-selling claims, the financial claims market now includes a variety of products and services including unfair bank or credit card charges, mis-sold payment protection insurance policies and unenforceable credit agreements.
While compliance work is being carried out in all claims sectors, particular attention is being given to the rise in the number of claims firms offering to help consumers bring cases in the area of unenforceable credit agreements since last summer.
We are concerned about this development, particularly where consumers are persuaded to rush to sign up to making claims and upfront fees are involved. In August 2008 we issued a joint consumer alert with the Office of Fair Trading encouraging consumers to consider their position carefully and seek independent legal advice on the subject of claims.
This was followed up with guidance to businesses on misleading advertising. Justice minister Bridget Prentice recently reminded firms of the need to comply with advertising rules.
We took action on marketing in response to concerns that consumers could be misled into thinking that making claims will help solve their debt problems, and to remind them to think about their options before paying for services that may not produce any benefit. The aim is to send a strong message that misleading marketing will not be tolerated and to encourage consumers to report any instances so they can be tackled.
Head of claims management regulation
Ministry of Justice