The Financial Conduct Authority (FCA) has initiated a review of claims management companies (CMCs) amid growing concerns that these firms are misleading victims of financial scandals, particularly the car finance scandal, regarding their compensation.
Key Concerns Identified
The FCA highlighted that some CMCs are engaging in aggressive marketing, misleading advertising, and imposing unfair exit fees. Additionally, consumers are being signed up without their permission or by multiple companies, which could delay any compensation they are owed.
Car Finance Scandal Targeting
CMCs have specifically targeted victims of the car finance scandal, charging fees of up to 33% of final payouts. The FCA and lenders advise consumers to avoid these firms, as the regulator's own scheme is free to use. Millions of people are expected to receive payouts this year over the motor finance scandal, where drivers were overcharged for loans due to commission payments between lenders and car dealers between 2007 and 2024.
The FCA also expressed concerns about the handling of other claims, such as those related to housing disrepair.
Regulatory Actions
Alison Walters, director of consumer finance at the FCA, stated: “CMCs and law firms can help consumers secure compensation they are owed. But too often consumers are being let down, eroding trust in firms that should be supporting them and damaging the economy. This review will give us a clear picture of how the market is working and galvanise the further actions that are needed.”
Aileen Armstrong, a director at the Solicitors Regulation Authority (SRA), echoed these concerns, noting that while claims management services can benefit consumers, poor practices are not in consumers' best interests.
In March, regulators including the FCA, SRA, Advertising Standards Authority, and Information Commissioner's Office formed a joint taskforce to address misleading adverts and sign-up processes, and to reduce the risk of consumers seeking multiple representation routes.
The FCA reported that it has already removed or amended 800 misleading adverts, and over 28,000 consumers have exited contracts free of charge. Three CMCs agreed to reduce their fees. Meanwhile, the SRA, which regulates about 9,000 law firms in England and Wales, has opened over 100 investigations into 76 firms that manage consumer claims.
Last month, the FCA banned an advert featuring edited and unauthorised clips of consumer rights expert Martin Lewis. The regulator was concerned that the ad claimed consumers would receive an average of £1,846 in motor finance compensation without explanation.
Industry Background
The UK's claims management industry expanded rapidly after a 2011 judicial review that set mass payouts for the payment protection insurance (PPI) scandal. CMCs earned between £3.8bn and £5bn from PPI claims from 2011 to 2015, according to the National Audit Office, prompting criticism from high street banks about low-quality claims.
In 2018, the FCA imposed a 20% cap on commissions for PPI claims, months before taking over regulation of the sector in spring 2019. By 2022, it capped commissions for non-PPI claims at 30%.
