Claims management companies (CMCs) could be forced to pay back millions of pounds to consumers under new plans announced yesterday by the Ministry of Justice.
It has handed over responsibility for the handling of claims management complaints to the Legal Ombudsman.
The change will mean CMCs could be forced to pay up to £30,000 in compensation to disadvantaged consumers, with the limit allegedly set to be increased to £50,000.
At present CMC customers can only complain to the Ministry of Justice (MoJ), which regulates the industry but does not have the power to arrange compensation. The new rules, to be enforced from 2013, will give consumers a chance to claim redress against rogue CMC firms for the first time.
However, the MoJ will continue to regulate the industry through its Claims Management Regulations Unit. Kevin Rousell, head of the unit, said: "We will continue to target those CMCs who do not comply and we will work in partnership with the Legal Ombudsman to root out those CMCs that take advantage of consumers."
The MoJ has been cracking down on CMCs following anger over a rising tide of unwanted texts and cold-calling from unscrupulous firms aiming to profit from the £10bn bank payment protection mis-selling scandal.
Rogue firms make promises of payouts for consumers, although many are not even eligible for compensation. The Financial Ombudsman warned this year that people in line for compensation have no need to use CMCs as they can make claims themselves without the need for a third party.
It forecast that around £50m of PPI compensation it will award this year will go to claims management companies needlessly. CMCs charge around 25 per cent of any compensation payout.
The MoJ has banned or shut down more than 700 rogue CMCs but there are still around 3,000 firms in existence in England and Wales alone. Mr Rousell said the MoJ will now focus on improving standards and taking wider action on any rule-breaking claims management companies.
Richard Lloyd of Which? said: "We want to see the Government do more to clean up the claims management industry. We want a ban on upfront fees and cold-calling."