When the payment protection insurance mis-selling scandal broke five years ago, early estimates put the total costs to the banks of refunding ripped-off consumers at anything from £2bn to £5bn. These turned out to be wild underestimates largely due to the efforts – or, some would say, predatory instincts – of claims management companies. "No win, no fee" CMCs have scoured the land for every consumer who could have been mis-sold PPI. Such are their tactics that in May Ofcom, the telecoms watchdog, revealed that 82 per cent of consumers it had surveyed had received cold calls in the past year, in the main from CMCs.
To date, some £9bn has been paid out by the banks, and the latest estimates suggest there is still another £5bn left in unclaimed compensation. "We are around two-thirds of the way through this process. Obviously, as you get closer to the end, claims can prove a bit more difficult to process," Ian Barlow, the legal director at one of the UK's biggest CMCs, Money Boomerang, said.
But the "difficulty" to which Mr Barlow refers has nothing to do with the much-publicised occurrence of false PPI claims – where people basically try it on. "It is not in the interests of claims management firms to take on such vexatious claims... We have very clear safeguards in place to weed out illegitimate claims at a very early stage," he explained. "No, the difficulty arises from banks dragging their feet over compensation. They were clearly told by the [City watchdog] to get a move on and settle claims fast so not to keep people waiting. This worked for a while but now we are back to the same old delaying tactics."
The result of slower payouts, according to Money Boomerang, is a recession in the CMC industry: "There are job losses going on and some of the smaller firms are going out of business – there is a cash flow crisis."
You would hardly expect the banks, which have seen the potential bill for PPI claims shoot through the roof, to be heartbroken over this. And they clearly blame the excesses of the industry for its own difficulties, rather than any foot-dragging by them.
"Any delays to payouts are being caused by less reputable CMCs clogging up the system with false claims. Banks have spent a fortune hiring lots of staff specifically to deal with this ... and we are processing as quickly as possible," a spokesman for the British Bankers' Association said. "Frankly, I don't know why people go through a CMC; they can come direct and be treated exactly the same in a timely fashion."
Victoria Stubbs, a risk and compliance consultant, says that the truth probably lies somewhere in between. "I have seen instances of claims being put into firms that didn't even sell PPI. However, there are definitely some claims which are being processed too slowly."
As for whether consumers are best off with or without a CMC, again Ms Stubbs sees both sides: "In an ideal world, no one should use claims management firms as there is lots of good advice out there from the likes of Which? [the consumer group] and Moneysavingexpert [the advice site]. But undoubtedly some of the CMCs do have a working relationship with the banks and that can speed response and they will take control of the claim, but that all comes at a hefty cost."
And what a cost: some CMCs take up to 40 per cent of any compensation. One leading bank executive suggests some CMCs use the tactic of threatening to take a claim to the Financial Ombudsman service, which can be very costly to contest, in order to get the banks to cave in – even if the PPI policy in question doesn't exist.
Now that the well appears to be running a little dry on PPI, claims companies are turning their attention to other areas. "We are looking at mortgage mis-selling such as interest-only and self-certification products," Mr Barlow said.
But it will be hard to replicate the PPI bonanza, according to Ms Stubbs: "The [City regulator] is not going back to the selling of interest-only mortgages like it did with PPI and telling them to compensate. Instead, it is simply telling lenders to ensure people with a shortfall are receiving the correct advice, rather than giving the green light to full mis-selling claims." It will also be harder for consumers to win cases, she added. "It's a difficult claim to prove. Particularly after the endowment mis-selling scandal, it's hard for people to plead ignorance after all the publicity."
If the CMCs want to keep their growth going, they may have to wait for another round of mis-selling in the financial services industry. Given its track record, they may not be waiting too long.