London, 19 July 2011
I accepted the British Bankers Association's invitation to talk to bankers about claims-management companies with some trepidation.
How can I put this? Neither banks nor claims managers are exactly popular at present. And there's rather a strange relationship between the two of you. Symbiotic but destructive. Some commentators have said you deserve each other.
But something needs to change. While you all argue, point fingers and blame each other, others are losing out. Consumers are being misled. Complaints and complaining is becoming more adversarial – less co-operative, less straightforward for customers. Charges and costs mount to no real benefit. And the ombudsman is left to sort out the problem.
But I believe the ombudsman can make a valuable wider contribution to this issue. We probably see the widest range of claims-management activity in financial services complaints.
Over the past five years we have the experience of receiving over a quarter of a million complaints from more than 1,000 claims companies and commercial third parties – in cases ranging from debt management to SERPS, from mortgage endowments to payment protection insurance (PPI).
And along with this wealth of practical front-line experience, we bring an independent and impartial view that otherwise often appears to be lacking in this debate.
So rather than point fingers, I'm going to propose a simple five-step action plan. A plan for the financial services sector, for claims managers, for the regulators, and for us at the ombudsman service. Most importantly, a plan to benefit consumers – and to help ensure they receive the best possible customer service if they want to make a complaint.
There is no easy way to say this. So let's just accept it – and move on. Claims-management companies are here to stay. Complaining about them is like complaining about the weather – often justified but not very constructive.
As the BBA found out to its surprise in its research a few years ago – and as the Financial Services Consumer Panel had confirmed following its own research – many consumers actually like claims-management companies, even if they have to pay (unnecessarily) for their services. And as consumers often tell us, when we ask them why they pay for something they could do themselves: “70% of something is better than 100% of nothing”.
Don't get me wrong. At the ombudsman service we find it as distasteful as many others that claims-management companies regularly charge large sums for a second-rate service. We find it shocking that the arguments they raise are often irrelevant – or wrong – or simply made up.
But equally, we find it disturbing that consumers have often been sold financial products on the back of practices that would never survive an FSA compliance visit or a complaint to the ombudsman service.
I am not saying that claims-management companies will inevitably continue to grow in influence when it comes to financial complaints. Far from it. In fact, beyond complaints about PPI, mortgage endowments and account charges, the extent of claims-management activity is actually quite modest.
Their claims-management business model relies on large volumes of straightforward, relatively high-value cases, from easy-to-find customers, where there is a high chance of success. Claims-management companies simply aren't interested in most of the kinds of cases that fill your and our postbags outside these areas of “mass complaint”.
But like it or not, claims-management companies can't just be wished away. And if your objective is simply to force them out of the market place, I don't think you're going to succeed.
Claims-management companies are here to stay – and they can't be ignored. There is an issue here that needs to be addressed head on. The clock can't be put back, however much some of us might like it to be. So what's needed now is fresh thinking.
Let's talk. Claims-management companies are a broad church. We have over 1,000 separate third-party representatives, ranging from high-street lawyers to back-bedroom outfits, to large claims-management companies. They range from the thoughtful and professional to the careless and near-criminal.
So I think there's a task for financial businesses and claims managers to work in partnership to encourage professional interactions – to promote professionalism and to marginalise the unprofessional.
I hope you and the Claims Standards Council are talking. I hope the Claims Standards Council is focusing on building strong professional standards across its membership – and not representing the lowest common denominator. And I hope the BBA is doing the same.
And at a practical level, emotional reactions – which, I have to say, are all too prevalent on all sides – don't get the job done. We need to talk to each other openly, calmly and professionally.
Let me take a simple practical example of where the current “megaphone relationship” isn't working. Sadly – and frustratingly – I have had to build a worryingly large team to handle disputes about whether or not the customer actually had the PPI policy they are complaining about.
I can see that identifying whether your customer was sold PPI can sometimes be difficult – after all, the FSA notes that “assumptive selling” was a widespread problem. And I can see, too, that receiving complaints about a policy that doesn't exist is frustrating to put it mildly.
But with too many people, on both sides, being obstructive, we have ended up in a wholly unacceptable place – which, if you think about it, is not helping financial businesses or claims managers. Or, dare I say, the ombudsman – let alone the consumer.
Many claims managers need to do more to establish the complaint. And many banks and financial businesses need to do more to be open and honest in their responses. It seems to me that this is the classic example of a problem that professionals on all sides should be able to work through for everyone's benefit. Claims managers, after all, have no incentive to pursue cases that have no prospects of success.
So we will be hosting a small meeting of financial businesses and claims managers to crack this problem – a problem that without dialogue will simply not go away of its own accord.
Higher professional standards should be underpinned by a strong regulatory framework. I want to pay tribute here to the hard work and dedication of the small team at the Claims Management Regulator. But they shouldn't be surprised that my third point is the need for a regulator that is ready and resourced to act earlier and more decisively when poor practice arises. We need a regulator that is able to act on principles – rather than be hidebound by detailed rules that can never cover all circumstances and future practice.
So I hope the relevant authorities will look again at the way regulation operates in this sector. The joint note that the Claims Management Regulator, the FSA, the FSCS and the ombudsman has published this week isn't a blueprint for future action – or a statement of our collective satisfaction with the current status quo. But it does, I trust, dispel some of the myths that have grown up about how present arrangements work – and how the present claims-management framework fits together in relation to financial services complaints.
Let me suggest some areas where it seems to me that regulation has fallen behind the poor practices that I observe – and where professional standards need to improve.
As a result of these hidden charges, poor sales practices and murky relationships, it seems to me that large parts of the claims-management market are not functioning properly. Fees vary widely. But if complaint volumes to the ombudsman are any guide, companies with high fees seem able to secure large market shares – larger than those who charge half the price, with no discernible difference in the quality of their service.
But let me be clear. I don't favour restricting claims managers' rights to represent forcefully the interests of their clients . That's their job. Claims managers should be free to make the points they choose about the rights and wrongs of their clients' circumstances.
But some present practice we see falls far short of decent advocacy. Advocacy is one thing. Encouraging fraud another. We have the right to expect a far clearer sense of professional standards of advocacy embedded across the claims management sector. If that doesn't emerge through concerted self-regulatory action soon – as I hope it will – then regrettably the statutory regulators will need to step in.
But regulation is always the second-best answer. Better to get the incentives right in the first place.
Let's be honest in recognising that claims-management companies don't exist for the fun of it. They exist because they meet a demand. A demand fuelled by mis-selling.
Claims-management companies exist because there has been genuine detriment to consumers – because consumers are not always aware of their rights and are often uncertain or fearful about how best to pursue them.
If the oxygen of mass mis-selling of financial products was removed, claims-management companies wouldn't be able to breathe. It's that simple. Mortgage endowments and PPI have fanned the claims-management fire. This is not “compensation culture” talking. This is banks and financial businesses that got things wrong on an industrial scale, leaving millions of customers with justified complaints.
And with a reported £8bn or more due in compensation to consumers for PPI mis-sales in the banking sector alone, it is not surprising that people see it as a business opportunity to take their share of what could be a £2bn claims-management market.
This is why the new regulatory framework for financial services is so important. We need to see financial businesses more attuned to the needs of their customers. And we need to see a regulator more prepared and able to step in, where large-scale problems start to emerge.
And I hope that the reality of large-scale consumer-redress programmes – imposed by regulators where necessary – will further enhance the incentives on financial businesses to sell, fairly and responsibly, the products that customers really want and need. Where wider problems have occurred, “collective redress” paid as soon as possible can ensure customers are compensated fairly where this is warranted – without the barriers and uncertainties of a complaint-based strategy.
All this must be very frustrating for those among you – and I know you exist – who didn't jump on the PPI bandwagon. Businesses that manufacture decent products and have responsible and thoughtful sales processes.
We need to move beyond “all banks are the same” – just as we need to move beyond “all claims managers are the same”. Greater transparency – for example, about the individual decisions we are making at the ombudsman service – will help protect businesses that have handled matters well – and expose those that have not.
My final point in my action plan for moving forward on the claims-management debate is about having open and honest alternatives.
In response to efforts by banks to encourage direct contact from consumers with complaints, I saw the following quote in a recent claims-management advertorial in a popular “celebrity lifestyle” magazine:
The recent message coming from the banks is that they would prefer any payment protection claim to be made through them. Would you rather put your faith in the company that may have mis-sold the policy in the first place, or an independent company who specialise in the issue? The choice is yours.
It's a sad reflection on the breakdown in trust – caused by events like the mis-selling of PPI – that this will be a convincing argument for many of your customers.
And it means that it's an absolute priority to re-build accessible and fair complaints handling in banks. And to build consumer confidence that, without being represented by a claims manager, consumers who complain will get a fair and straightforward deal. I know this is something that many of you are trying to achieve.
We also need to do more to underline the value of free services that help consumers who are uncertain how to proceed. And we need to guard against the move to increasing formality in complaints handling – which sometimes seems a valid response to poor claims-management behaviours.
Again, I think the ombudsman service has an important role to play here. I don't see us spending large sums advertising on daytime TV – although some have argued that we should.
But I do believe that the ombudsman needs to be an actively accessible and open service. In areas like PPI, we have a clear obligation to help consumers navigate the minefield of claims-management practices and complaints-handling complexities – to be able to make fair, honest and informed complaints.
And in doing this, we will support other free consumer-advice services and networks, as well as those financial businesses that share our values of accessible, simple-to-use – and above all fair – complaints handling.
I've set out above the first five steps on an agenda for action that involves:
I trust that together – by which I mean financial business, trade associations, consumer representatives, the ombudsman service, regulators and claims managers – we can move forward constructively. At the ombudsman service we'll certainly continue to play our part.