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 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.