The warning bells were sounded after one vulnerable client, now being represented by adviser Felix Milton at Philip Milton and Co, was hit with an £11,714 bill on a £32,539 compensation payout.
He said: “In this case, it’s a vulnerable client who tried to cancel but was told he had come too far to do so. It’s ridiculous.”
Mr Milton’s client was invested in potentially illiquid and high-risk investments by the now-defunct discretionary fund manager Organic Investment Management Limited and the advice companies associated with it.
The client claims he was cold-called by the CMC, who is not being named, when the DFM first went into default.
From mid-July to September this year, the client tried to cancel his agreement with the claims company via phone calls and emails after discovering he did not need to pay more than a third of his compensation in fees.
The client was later told he had “come too far” and had “stopped and started too many times” to cancel his agreement with the CMC.
The CMC denied any cold calling and said although the client had made contact about cancelling the claim, he later confirmed he would continue the process in a telephone call with a company director.
According to the Financial Conduct Authority, authorised CMCs must offer a 14-day cooling off period when a customer can cancel a contract without being charged.
After the 14 days the CMC must also allow customers to cancel the agreement, but can charge cancellation fees that are not in excess of what is “reasonable in the circumstances and reflects the work undertaken”.
In October, the client received a letter congratulating him on his self-invested personal pension “win” and paid £11,714 to the CMC – 36 per cent of the total payout.
As a result, he has added his voice to recent calls for the FCA to introduce a fee cap on CMC charges.
Calls for fee reform
The Financial Services Compensation Scheme does not charge individual consumers or CMCs for using its service, and Mr Milton said it was possible to charge a maximum of £375 for the time spent in submitting a claim.
He said: “I would like the regulator to introduce a fee cap. That would destroy their current business model.
“The FCA has decided the defined benefit market is hurting consumers so it has introduced a contingent charging ban. The same should happen for CMCs. A fee cap of £1,000 – win or lose – would sort out a lot of the issues.”
Philip Milton and Co, a discretionary fund manager and adviser with claims management permissions, has secured £861,000 in compensation for Organic clients so far, having charged a total of £8,400 across a number of clients – less than 1 per cent of the total payout.
Tim Morris, IFA at Russell & Co Financial Advisers, agreed the regulator must focus on CMC fees as “a matter of urgency”.
He added: “More so than adviser fees, even if these are still in need of further reform. Thankfully, it’s safe to say that no adviser – certainly post the Retail Distribution Review – will charge anywhere near one-third of a client’s funds.”
Last week, the FCA warned in a ‘Dear CEO’ letter many CMCs still had a poor attitude towards their regulatory obligations.
One of the areas the watchdog, which assumed regulatory control of the industry last year, raised concerns about was poor disclosure of pre-contractual information about fees.
Darren Cooke, chartered financial planner at Red Circle Financial Planning, warned the fees of some CMCs were “frankly outrageous”.
Mr Cooke said: “It is an area that certainly needs tighter controls in terms of fees and I would also support moves to prevent CMCs cold-calling former clients of a failed investment, no matter how they obtain their details.”
Alan Chan, director at IFS Wealth & Pensions, said a fee cap on CMC charges was a sensible proposal.
Mr Chan said: “I think alongside this the FCA outlawed contingent charging for CMC services much like for pension transfers.
“Currently the ‘no win, no commission’ arrangement encourages bogus claims because there is nothing to lose and all to gain by sending out generic complaint letters.
“They are only paid on a successful claim, which means there is a heavy element of cross-subsidy among clients, which is why their final commission is such a high percentage.
“Clients should be required to pay a fee for their services regardless of a ‘win’ or not. It’s the only way to foster a professional culture in the CMC world.”
Change needed at the FSCS
Other suggestions for reform included the FSCS taking a more proactive approach when companies went bust.
Mr Milton said: “The FSCS could ask the administrators for a list of the clients and simply be in touch about the claim from that point on.
“Or at least, as the FSCS knows when it is going to accept the claims, the scheme could write to those consumers affected, rather than letting the CMCs circle around customers.”
An FSCS spokesperson told Financial Adviser that, in the cases of larger failures and where it can, the lifeboat body explores the possibility of contacting all customers of the failing business at the start of the compensation process.
The spokesperson said: “This is often carried out through the insolvency practitioner.
“Where it is not possible to contact customers up front in a reasonable time period, we may decide to start to assess claims to reduce wait times and provide a good customer journey.”
The Financial Guidance and Claims Act placed a duty on the FCA to make rules to secure an appropriate degree of protection for consumers from excessive charges for financial services and product claims.
It is understood the FCA is considering how best to meet this duty.
imogen.tew@ft.com & rachel.mortimer@ft.com
