RegulationMay 20 2016

FSA is to blame for claims firms’ success

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Recent reports that claims firms had taken as much as £5bn of the compensation intended for those mis-sold payment protection insurance (PPI) were greeted with predictable uproar.

The figure, pulled from a government select committee paper, follows the announcement in this year’s Budget the FCA would take on responsibility for tighter regulation of an industry everybody seems to dislike: those forced to pay out for obvious reasons, and the general public who are supposedly benefiting, due to the harassment of cold calling.

If you have a phone, calls asking if you’ve been in an accident arrive with the same frequency as mentions of Leicester City’s title odds at the start of this season.

So the Public Accounts Select Committee has called for something to be done, crying, “Action must be taken to prevent further mis-selling,” decades after that particular horse has bolted.

The action that should be taken is educating the masses, and, beyond making the Fos more visible, that is not going to be achieved quickly.

Further, by directing its ire at perceived mis-selling, the committee continues to overlook the environment which has allowed these claims firms to proliferate. And it ignores the role regulation has played in enabling that environment.

I can not call these companies liars, but I was receiving calls assuring me I was entitled to compensation long before I had even passed my driving test.

Anyone who worked in retail personal finance around the turn of the millennium could tell you that it has been obvious for years that this is where we were heading.

The explosion in PPI claims has been fuelled by astute organisations encouraging a grabby mentality from people out to get what they can, while regulators have done nothing to dissuade the dishonest.

At the height of endowments mis-selling, it was advisers who largely bore the brunt, so there was little impetus for the powers that be to act.

Endowments were followed by split caps, then myriad other vehicles vying to be “the next big mis-selling scandal”.

In those days the FCA’s predecessor, the FSA, issued fines on the basis that companies had not dealt with complaints quickly enough, never mind that an army of chancers had produced a deluge of letters for their complaints teams to deal with, and which no doubt went some way to concealing the appeals from genuine victims

The culture whereby advisers and providers were seen to be guilty until proved innocent undoubtedly saw many who had suffered no mis-selling still receive compensation, as providers paid out without properly investigating the claim, for fear of being penalised for not being seen to act quickly. Speed was more important than fairness.

The natural conclusion drawn from these payouts was that the advisers who sold the products were at fault. This was the key driver in the spiralling cost of funding the Fos and FSCS, and the difficulties IFAs have to this day in obtaining reasonably priced PI cover.

The refusal to enforce a long stop has only exacerbated the problem and there is still money to be made from advisers, as evidenced by claims manager Rebus finding a buyer for its book of claims against IFAs earlier this year.

For so long the balance has been so skewed towards those claiming that there is no concept of a fair hearing, or justice being served. The odds are so stacked in favour of claimants that companies that syphon off just a percentage of any winnings can afford to employ an entire call centre to ring the general public at hourly intervals to discuss a car crash they haven’t had.

I can not call these companies or their representatives liars, but I was receiving calls assuring me I had been in a car crash and was entitled to compensation long before I had even passed my driving test. That should speak for the levels of honesty involved.

It is undeniable that mis-selling has occurred in PPI as much as endowment mortgages, and those affected should be compensated in full, without having to pay up to 25 per cent to a firm that has done little more than fill in some forms on their behalf.

Mis-selling is a terrible thing, but it was a terrible thing 20 years ago and the claims companies that have been allowed to spring up around it are a direct result of a regulatory failure to properly oversee the complaints and claims procedure then.

Regulation of the parasitic industry that has now attached itself to PPI is overdue and welcome. But if the regulator had acted properly years ago, these companies might not have been able to become so big in the first place.