A small group of claims management companies collected almost £12m in fees on pension claims over the duration of one year, according to data collected by the Financial Conduct Authority.
Figures published by the City watchdog yesterday (January 21) revealed the results of a survey of 33 of CMCs, which it used as the basis for a proposed fee cap in the sector.
The sample included 11,446 claims made in 2018/19 in relation to pensions, which had generated more than £11,885,000 for the 19 CMCs active in this category and operating on a 'no win no fee' basis.
The FCA acknowledged pensions accounted for the largest category of claim by total revenue for CMCs, because these type of cases typically yield higher amounts of compensation.
This means where CMC revenue is earned as a percentage of redress, revenue will generally be larger from claims yielding greater compensation.
It comes as plans outlined by the FCA to cap fees charged by claims management companies would wipe tens of thousands of pounds from fees charged to consumers pursuing a pension claim.
There are currently about 223 firms carrying on FCA-regulated claims management activity for financial products and services, not including PPI claims, with an estimated revenue of £38m in the 2019/20 financial year.
Of the pension claims included in the FCA's sample, the mean revenue for a CMC was £5,625, the minimum sat at £9 and the maximum reached £87,311.
But under the FCA's new rules, the maximum fee charged by a CMC for any financial product or service claim would be capped at £10,000 - a saving of more than £77,000 for the consumer in that particular pension claim.
Proposed fee cap:
Source: The FCA
Fee caps on the horizon
The FCA proposed capping CMC 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 payout.
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 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.
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.
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.