The Scottish Government last week said that it would consider regulating claims management companies (CMCs), just five years after insisting there was no need to do so.
The u-turn appeared in a long-awaited response to the Taylor review on the funding of litigation, which proposed that the Scottish Government establish a regulator of CMCs. Holyrood has stopped short of accepting that recommendation, however, indicating that CMCs should only be covered “as part of a wider review of regulation of legal services”.
Its response came amid fresh controversy over the way the UK’s biggest banks are treating customers seeking compensation for mis-sold payment protection insurance (PPI).
It was reported on Thursday that banks have underpaid PPI compensation by up to £1 billion, as they failed to refund fees and charges incurred on credit cards as a result of PPI premium payments. The problem is said to primarily affect borrowers who have credit cards with MBNA, Barclays, Capital One and Lloyds Banking Group.
PPI accounted for 78 per cent of all complaints it received in the year to the end of March, according to the Financial Ombudsman Service (FOS). The FOS also revealed that more than seven in 10 PPI complaints were brought by claims management companies (CMCs), up from 57 per cent last year.
People using CMCs to make PPI complaints are no more likely to succeed than if they take action alone, said the FOS. Yet where the claims they submit are successful, the firms typically take 25 or 30 per cent of the redress paid to the consumer.
Claims handlers have pocketed up to £5bn of compensation paid to PPI mis-selling victims, according to research by Citizens Advice Scotland (CAS) and Citizens Advice. It warned of poor practices by CMCs, such as a lack of transparency around charges, high pressure sales tactics and problems cancelling agreements.
The firms are regulated in England and Wales by the Ministry of Justice, which has forced hundreds of claims handlers to close down. Consumers south of the Border will soon be able to take complaints about claims firms to the Legal Ombudsman, under proposals published last month.
In Scotland, however, they still aren’t regulated. The case for rectifying that was part of the review of expenses and funding of civil litigation in Scotland, published last year by Sheriff principal James Taylor.
The Scottish Government’s response was finally issued last week and included a commitment to consider the case for including CMCs “as part of a wider review of legal services regulation”.
It added that in the meantime it would look into “whether further action should be taken to curb unacceptable practices”.
But it still hasn’t gone far enough, according to Mike Dailly, principal solicitor at Govan Law Centre.
“Justice minister Kenny MacAskill has sat on his hands and failed to act and allowed Scotland to be a free-for-all – the Wild West – for CMCs,” said Dailly. “Consumers need protection and the ability to get swift, non-court-based redress from CMCs in Scotland who operate unethically or unfairly. It is staggering that the Scottish Government has failed to protect Scottish consumers.”
Until they are regulated, CMCs can continue to operate in Scotland with no minimum standards or rights of redress for customers, said Dailly.
Previous calls to regulate CMCs north of the Border were dismissed despite a 2009 consultation which found that 85 per cent of respondents wanted Scots to be given legal protection against CMCs.
Susan McPhee, head of policy at CAS, said she agreed with calls to regulate CMCs to “ensure they operate fairly”.
She added: “The main message we have on CMCs is that people should think carefully before using them at all, because claiming compensation for mis-sold PPI is in fact very simple and can be done by anyone, without paying money to a third party like a CMC.”