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Claims firms could start to damage the economy

It was widely believed that lenders had gone big with their provisions to pay out claims for the mis-selling of payment protection insurance but now it is clear they underestimated the scale of the scandal.

Lloyds Banking Group has increased its claims pot by £375m, bringing the total to a whopping £3.575bn.

The move comes soon after Barclays increased the total amount set aside by £300m, making a total of £1.3bn.

The amounts are eye-popping and are severely hitting the profits of banks, with Lloyds group losing £3.5bn in Q1 2011 and making a profit of just £288m this year.

The backlash for these unexpected increases being directed at claims management firms..

Antonio Horta-Osorio, chief executive of Lloyds group, is reported as saying they must be stopped and that frivolous claims are tantamount to fraud.

His calls follow a Which? and MoneySavingExpert.com summit held last month to launch a marketing campaign dissuading customers from using them.

Mortgage Strategy was ahead of the curve when we launched our Make Claims Firms Pay campaign in September last year.

It calls for claims management firms to pay a fee for claims that are deemed frivolous or without merit.

It takes some doing to unite banks, brokers and consumer bodies against a cause but claims firms have done just that.

No doubt it is costing Lloyds and Barclays money to dismiss claims without merit and a deluge is coming from claims firms.

It is also possible the banks underestimated the scale of the mis-selling problem when making their original provisions.

It is hard to say which is the more important factor although the anger greeting claims firms from bank bosses shows the impact they are having and Horta-Osorio claims 25% of all claims were submitted by people who didn’t even have a Lloyds’ product.

It is not unreasonable to infer that claims firms are now moving beyond mere annoying phone calls and texts to material damage to the economy.

By creating a frenzy and costing banks tens of millions more, perhaps even hundreds of millions, to deal with nonsense claims these firms are eating into the profits of our biggest financial institutions.

It means less mortgage lending, fewer business loans and a slower economic recovery. It would be good to see some research on the impact such firms have when by submitting frivolous claims.

A Freedom of Information request by the Law Society Gazette shows the Ministry of Justice struck off 700 firms last year.

It also launched an investigation into firms after a wave of invalid claims and now has a dedicated team looking into poor practices.

It is the first sign of a crackdown on poor practices at some firms. Other claims management firms can provide a limited, useful service so long as customers are fully aware they are charged a fee and that they could pursue a straightforward claim without intermediation.

In the main for legitimate mis-selling claims these firms are making money from customers and for illegitimate claims they are wasting banks’ time and, significantly, their money.

It is surely not unreasonable to believe claims firms are having such a detrimental effect now.

Instead the blunted bank profits are recycled to some mischievous claims companies trying to throw enough mud at the wall and hoping some of it sticks.

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  • D 2nd May 2012 at 4:37 pm

    Why do you not report about cases where clients have been mis – sold ? I agree that fake claimants should be sent to prison but equally was fraud not being carried out by the indviduals that sold a policy they knew could never pay out ?

    Why do the banks need to increase their reserves if there are no claims to pay out ??? Have they written to any let alone all their clients that could be effected ?? Why do you get paid out rapidly by a cmc but have to wait months when you do it yourself ??

  • Chris 2nd May 2012 at 2:42 pm

    HW I fail to see the point your making if we admit that there has been an issue of miss selling but we also accept the fact that fraud should not take place then all of PB’s complaints should be valid. That is hardly worrying but merely expected.

    The issue PB raised is half should not be unfounded if people did not commit fraud which as Peter Turner kindly pointed out above is outlawed.

    Or am I missing the point do you work for a CMC?

  • craig 2nd May 2012 at 2:27 pm

    the “unexpected increases” are the FOS case fees which is now £850 if you have more than 25 go to FOS

  • HW 2nd May 2012 at 12:52 pm

    PB you quote “I can confirm that over half of the complaints we receive are unfounded.” Conversely, you are confirming that a large number of complaints ARE founded? Seems worryingly large.

  • Crying for the Bankers 2nd May 2012 at 12:45 pm

    Not half as much as the bankers already have. Perhaps they could spare a few shillings from their bonuses, to help those they mis-sold to in the first place. Hope they can sleep in their beds at night, knowing what they have been party to. It’s a total disgrace that it was ever allowed to happen. Was it not a form of theft?

  • Peter Turner 2nd May 2012 at 12:38 pm

    @Chris – it IS outlawed.

    Section 2 of the Fraud Act 2006 says:

    “Fraud by false representation(1)A person is in breach of this section if he—
    (a)dishonestly makes a false representation, and
    (b)intends, by making the representation—
    (i)to make a gain for himself or another, or
    (ii)to cause loss to another or to expose another to a risk of loss.
    (2)A representation is false if—
    (a)it is untrue or misleading, and
    (b)the person making it knows that it is, or might be, untrue or misleading.”

    There is no exemption for CMCs or standard letters. The problem is not the law itself – it is that the MOJ will not enforce it.

  • Chris 2nd May 2012 at 11:36 am

    I agree with Stuart the real story here is normal law abiding people are committing a very serious criminal offence by making an unsubstantiated claim for being miss sold.

    When you factor in the level of due diligence a CMC must go through that does not even establish if a plan has been sold it makes me think that these very large scripted claim letters are equally fraudulent on the basis that the claims cannot be substantiated in their entirety.

    These companies work on a scattergun approach of throw enough mud and some of it will stick, this sort of approach should be outlawed by the MOJ.

    Let’s face it, in court a lawyer would not be able to make 32 claims of failure in the hope that one sticks, the judge would throw out the case in a heartbeat and probably reprimand the lawyer for such a reckless and incompetent approach.

  • PB 2nd May 2012 at 11:02 am

    Dealing with these complaints at a DA brokers myself, I can confirm that over half of the complaints we receive are unfounded. I have today had 2 to deal with that had no MPPI whatsoever. The claims companies don’t know what they’re doing, writing to lenders instead of brokers, not understanding the time limits, they have one generic letter, not carrying out a simple check of the FSA register or companies house to find out of the company is even trading… I’ve even seen jobs advertised on a self employed basis for “Document Collectors” for CMCs, no experience necessary of course!

  • Stuart Duncan 2nd May 2012 at 10:40 am

    @ yawn yawn. You must be from a CMC – anyone who doesn’t see this as a major problem MUST have a vested interest in making a dishonest buck from it.

    Whatever angle you look at it from, money spent dealing with fraudulent claims is misdirected money.

  • Not easily fooled 2nd May 2012 at 10:40 am

    Lets just relaise why we are in this position. It was the ointroduction of PS10/12 that the banks were scared of as it suggested they shgould go back over all sales of these policies to identify any potential issues. The banks didnt like this and decided to go for a judicial review. Please also rememebr that root cause analysis and redress of similar customers was not a new requirement and was merely a reconfirming up of DISP rules. So they lost the court cas a year ago and have they yet gone back over the porevious sales? No. Apparently this will be done by the end of the year – so PS10/12 was summer 2010 – 2 years ago and they still havent contacted there own customers yet want CMCs to be shut down. Trust me Antonoio – if you want me to go out of business, why not contact all your customers who you sold PPI to and I wouldnt have to do it for you

  • Cunny 2nd May 2012 at 10:36 am

    Shouldnt forget all this would have been avoided had the banks not mis sold billions of ppi in the first place! About time the banks were held to blame for something, the only reason they are against claims companies is because they have had to pay out much more to wronged customers.

  • Dave 2nd May 2012 at 10:32 am

    I agree about the frivolous claims and almost every firm has had these types or claims (or will soon get some) – they must be stopped.

    However, how can it be wrong that the big banks (who are the worst culprits by far) are required to GIVE CLIENTS THEIR OWN MONEY BACK which they took from them unfairly or improperly?

    If that means some heads roll at these organisations or the shareholders have to dip into their own pockets for once (and not those of their clients), then that will be a good thing.

  • yawn yawn 2nd May 2012 at 10:24 am

    More drivel from MS about CMC’s. Now they are damaging the economy… What next? blaming them for war and hunger across the world. Turn it in.

  • yawn yawn 2nd May 2012 at 10:23 am

    More drivel from MS about CMC’s. Now they are damaging the economy… What next? blaming them for war and hunger across the world. Turn it in.

  • Stuart Duncan 2nd May 2012 at 10:18 am

    These claims almost polarise into two extremes – those that have potential validity and those that involve fabrication. The latter are fraudulent and it is time that the authorities treated them as such and begin arresting those involved. I have little sympathy for the banks that perpetrated mis-selling, but this is becoming fraud on a national scale now, which FOS and FSA are doing little to discourage.

  • Mary Lockyer 2nd May 2012 at 10:15 am

    How about a first step in making unsolicited calls illegal by these companies (I have had two personally) and making them advertise in large print they charge a fee/% of the claim. They have also managed to create a distrust of payment protection in many who genuinely have a need and cannot understand the difference in single premium PPI and MPPI paid monthly. Perhaps the FSA would take an advert to educate the public on the limitations of state benefits, and outline where MPPI is suitable, to counter this anti protection culture that is being peddled on TV and the media

  • GMS 2nd May 2012 at 10:08 am

    I totally agree with this article. Many Claims MAnagement Companies have gone beyond the realms of honesty and integrity and are causing havoc. However this has been happening to brokers for a long time with frivilous claims to the Ombudsman costing innocent brokers £500 per case even when the broker is forund to have done nothing wrong. Where were the big voices of the banks when brokers were up in arms? Oh yeah, sat back not giving a hoot. Now that their profits are at risk it is expected that there should be action taken.
    This practice is easily stopped. Make the loser accountable for the costs. CMC’s will not risk any money so at a stroke the claims will drop to genuine ones only. No bank will begrudge paying out on a genuine case but when they are being forced in effect to pay every case as the cost of defending it makes it uneconomical then there is a huge problem.
    This is an opportunity for every sector of the industry to come together and support each other.
    If we have one voice and one set of rules then there is a chance to eradicate this cancer on our industry.

  • Jean Gray 2nd May 2012 at 10:05 am

    I wholeheartedly agree with these comments. Lenders in all forms are being inundated with spurious claims – some as old as 15 years ago! Quite a lot where there was no PPI – but still, the case has to be reviewed and a full response drafted. Total waste of resource and money, which could be put to much better use. The Regulators/Government need to curb these companies and the American style litigious disease they are spreading.

  • We're all doomed!! 2nd May 2012 at 10:00 am

    It’s ironic that many claims firms were set up by ex brokers – many of whom would have sold MPPI.

    I wonder if they will return to advising on Mortgages and Insurance, if and when the market improves. I then wonder how the “biting the hand that feeds” scenario will pan out?!!