The City watchdog has cracked down on claims management companies in a move which would cap fees and save consumers an estimated £9.6m a year.
In proposals published today (January 21) the Financial Conduct Authority looks set to cap fees at between 15-30 per cent of the compensation paid for most claims against financial products and services, depending on the size of the pay out.
The regulator warned some consumers were paying "excessive" charges of more than 40 per cent and the percentage-based no-win-no-fee charging model used by CMCs could "exacerbate harm" in some cases.
The FCA predicted a fee cap would save consumers thousands of pounds on the fees paid to CMCs for claims against financial products and services, with an estimated saving of £9.6m a year.
There are currently about 223 firms carrying on FCA-regulated claims management activity for non-PPI financial products and services, with an estimated revenue of £38m in the 2019/20 financial year.
The cap would apply to all cases where a consumer is awarded monetary redress, with a final policy statement expected from the regulator in Autumn this year.
Sheldon Mills, executive director of consumers and competition at the FCA, said: "We took over regulation of CMCs in April 2019, and have since been proactively supervising the sector.
"When working well, CMCs can provide useful services for consumers.
"However, consumers can experience harm when they do not understand the nature of the service CMCs provide and where they are charged excessive fees."
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Max % rate of charge
Max total fee (£)
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Source: The FCA
The regulator said: "We think the wider value that CMCs offer is beneficial. We do not want to lose this value by causing FCA-regulated claims management to become unviable.
"But when the value accrues to non-fee-paying customers, the cost of it should be recovered from fee-paying customers only so far as this is necessary to allow FCA-regulated CMC activity to remain viable."
Since it assumed responsibility for CMC regulation in 2019 the FCA has doubled down on its expectations that firms should signpost consumers to free alternative routes of redress such as the Financial Ombudsman Service.
But the issue is ongoing, with the regulator proposing stricter rules in today's consultation on CMCs disclosing alternative options for redress before a consumer enters into a contract with the firm.
The FCA said: "Our existing rules go some way towards informing consumers of the option to claim direct, but these rules can be enhanced to ensure consumers are better-informed when choosing to engage a CMC to progress their claim.
"In our view this is best achieved by requiring the statement and information about that option to be isolated in the pre-contractual disclosure, and that the consumer confirms, by way of separate confirmation, they would like to continue engaging a CMC despite understanding they have the option to progress their claim for free, by themselves."
Source: The FCA
The FCA's proposals will not apply to claims for payment protection insurance, which already has a 20 per cent fee cap in place for CMCs.