The PPI mis-selling scandal saw the emergence of a new industry with the birth of Claims Management Companies (CMCs). Producing riches for CMC bosses, and employing 20,000 people at its height, the CMC industry was unique to the UK, perfectly placed to help consumers secure PPI compensation, with banks paying out close to £50 billion in payments and admin costs. But, with August 2019 marking the PPI claims deadline, not to mention the cap on the commission that CMCs can charge being set at 20% plus VAT in 2018, and the fact that they now fall under the jurisdiction of the FCA, the future is destined to be very different for CMCs.
So, what next? Well, there’s a range of alternative markets to be explored, including packaged bank accounts, pension transfers, GAP insurance, payday loans and holiday sickness. PPI set a precedent in that firms could be punished for historic practices judged to be unfair even if they weren’t against any rules at the time, giving CMCs plenty of scope to search for alternative sources of revenue across the financial services sector. However, none of these markets are likely to produce the same sort of revenue as PPI, especially considering the cap on commission charges, and so it’s inevitable that we’ll see a distinct shrinking of the CMC industry in this respect, although not a complete eradication of the industry by any means.
The issue of the FCA taking over as regulator complicates things further still. The trade body of CMCs, the Alliance of Claims Companies, issued a dire warning that up to 80% of CMCs might disappear as regulation increases. While this is obviously a worst-case-scenario prediction, the fact that seemingly only 350 CMCs that specialise in financial services have secured FCA authorisation, out of the almost 700 CMCs thought to be previously active, suggests that increased regulation is definitely causing headaches for the CMC industry.
A sideways step
However, in an industry known for its entrepreneurialism and tenacity, some CMCs have taken steps to avoid the inevitable challenges that increased regulation can bring. With a view to avoiding the watchful eye of the FCA, some CMCs have changed the very essence of their business, morphing from CMCs into solicitors. This means they’re still able to represent their clients in mis-selling claims, albeit as a legal services provider as opposed to a CMC that’s held accountable by the FCA. Ultimately, we could see a shift in the UK towards a more litigious society, much like we see in the USA, with legal representatives keen to secure compensation for their clients wherever possible.
So what does all this mean for the financial services industry? Well, for a start, it means that there are still CMCs (or their new ‘legal industry’ equivalent) out there keen to seek out their next profit centre to secure the very existence of their organisation. Financial services businesses would be naïve to think that CMCs will disappear without a fight and need to ensure they continue to follow best practice in everything they do, not only to avoid costly compensation claims but to maintain healthy customer relationships for those all-important increased retention rates.
For many financial services businesses, PPI and the rapid and sudden success of CMCs were a wake-up call to put best practice at the heart of every customer interaction, with watertight compliance and best-in-class customer service now a prerequisite for doing business. While there is still room for well-run, responsible CMCs, a more diligent financial services sector will make it increasingly difficult for them to get much traction, with financial services businesses putting customer interest front-and-centre alongside a programme of stringent compliance to minimise grounds for compensation claims and secure that all-important competitive advantage.