After much speculation Wonga has succumbed to the mountain of miss-selling compensation claims against it. The Payday sector is an industry that I understand quite well and I am reliably informed that the vast majority of Payday claims are coming via templated letters from claims management companies on a no win no fee basis. These easily generated template letters trigger an exhaustive and expensive process for the recipient firm to follow.
So, the question I am examining is whether the claims management industry is a force for good, or is it an insidious force pervading any industry it sees as vulnerable to attack?
Since the change in UK legislation in 1995 allowing so called “No Win No Fee” litigation arrangements, we have seen the compensation culture mushroom into the multi-billion-pound industry that it is today. The culture of individuals seeking (or more commonly being encouraged to seek) compensation for anything from a trip or fall, to car damage from a pothole seems to move closer to the litigious mentality of the United States consumer with every passing day. This growth has brought with it many beneficiaries including those people who have been genuinely injured by another party and the employees and owners of these burgeoning businesses. It is also fair to say that TV and Radio advertising agencies count compensation lawyers amongst their most prolific spenders. Simply being able to pick up the phone and access professional legal representation irrespective of your financial position, was the aim of this legislation and this is why it was the right thing for the government of the day to do.
But closer inspection of the behaviour of the claims industry poses some serious concerns about what the legislation permits. This industry has its roots in the personal injury space and it grew quickly. There was hardly a TV commercial break without at least one advertisement asking “have you suffered an injury at work or whilst driving?” and this prompted tens of thousands of people to pick up the phone and lodge a claim that they previously may not have perused, and good for them. But just as this industry seemed to have reached saturation point along came its biggest pay day, (no pun intended) the PPI mis-selling scandal. Frankly, this dwarfed the personal injury claims market and saw a deluge of marketing encouraging everyone to lodge a claim “even if you cannot remember the name of your lender!”. If the consumer could not even remember the name of their lender the question must be asked, did they actually have a grievance and were they ever likely to seek compensation had they not been prompted to do so?
Then the industry targeted holiday-makers who “fell ill” abroad, “victims” of timeshare mis-selling, pensions mis-selling, travellers who suffer flight delays…… and the list goes on. Now the Payday loan industry is firmly in their sights.
Many people will argue that an industry such as Payday with its high rates of interest and unsavoury practices is deserving of attention from these compensation law firms. However, we must always be cognisant of the fact that in any industry there will always be those that flout the rules and others who follow good practices. The feedback I have received suggests that the claims industry does not seem to discriminate very well and appears to have a low proof threshold before initiating a claim against the target company. Stories have emerged whereby claims have regularly been received relating to “irresponsible lending” where the consumer was actually refused the loan by the lender. In such examples clearly very little, if any, verification of the consumer’s story has taken place.
I will focus on the other areas of compensation in a moment and ask how much they cost us all in less obvious ways, but for now I want to stick to the financial services areas of Payday, Pensions and PPI.
There can be no debate or doubt whatsoever that certain people in certain companies at certain times were guilty of malpractice and for that, they should be held accountable and the injured party compensated by them. But many ethical and diligent firms are also being caught up in the melee.
The problems that I personally have with the way in which these sectors have been attacked by the claims industry are as follows;
- The financial services firms who transacted with customers, sometimes many years ago, are being judged against criteria and best practices of today, and;
- The irrecoverable cost to firms of defending claims often makes it more economical to simply capitulate and pay up.
The compensation lawyers know that in order to defend a claim for a small PPI policy or a Payday loan, the defending firm will ultimately have to pay several hundred pounds to the Financial Ombudsman Service in order for them to process the defence. In addition to this the firm will also have to spend many man hours addressing the particulars of the claim and responding to the claim handler, possibly going back and forth several times. Faced with such a choice, even if the firm believes they have a cast iron defence, it is simply cheaper to pay up. Surely that cannot be right? We all want to ensure a fair and robust financial services industry, but at what cost.
At this point you may well be thinking “well those payday lenders and pensions and insurance firms deserve everything they get” and you’ll be coming down firmly on the side of the compensation lawyers. But here’s the thing, who is next in their sights, could it be your industry?
Let’s look back over the impact of these companies on our daily lives and ask, “what is the true cost to all of us?”
The NHS has, without doubt seen the impact of more patients deciding to sue for medical negligence, but how many of these are genuine and how many have unnecessarily added to the financial pressure of the already under-resourced NHS. Earlier this year several leaders of the NHS warned the government that the rising cost of clinical negligence claims was having a significant impact on the health service. The group, which includes the chairs of the British Medical Association and the Academy of Medical Royal colleges, said the NHS spent £1.7bn on negligence claims last year and the annual cost has doubled since 2010/11.
They added that the estimated total liabilities, which is the cost if all current claims are successful, stood at £65bn, up from £29bn in 2014-15.
Then there is the cost of car insurance! Every single one of us who drives a car and pays for car insurance will pay on average about £50 per annum extra on our premium (according to the ABI) just as a result of known fraudulently submitted motor claims. But what about the extra we now pay because of the huge increase in personal injury “whiplash!” motor claims that previously simply did not exist. How many of us have received a cold call asking us about the car accident we had recently, when in fact we had no such accident?
Our local councils pay for injuries from trips and falls on its pavements whilst industry is buried in red tape to ensure that its covered by insurance in the event of a compensation claim.
It has long been recognised that commission-driven financial services sales are likely to drive-up instances of mis-selling. We also quite rightly do not financially reward our law enforcement officers based upon arrests and convictions, to do so would likely result in miscarriages of justice. Why then should it be acceptable for some claims firms to encourage people to make speculative claims, or even worse, to lie.
For example, the Association of British Travel Agents (ABTA) said there were around 35,000 gastric sickness claims by British holidaymakers in 2016, a 500 per cent rise since 2013. The majority of the complaints were reported by claims management companies who cold call tourists once they arrive home. A loophole allowed dodgy claims management firms to levy unlimited legal costs for incidents that take place overseas. Tour operators fighting the claims have therefore had to pay costs well out of proportion to the damages.
The claims handlers are clearly commission driven and in some cases are encouraging deception. In fact several high profile cases have resulted in holidaymakers being jailed after submitting fraudulent claims via claims companies, only to be found out via their social media account showing them enjoying their holiday. One 23-year-old was found on camera dancing ‘Gangnam style’ as well as relaxing by the pool in photos at the time he was allegedly sick.
This is not a simple or straightforward conundrum, it is a complex area worthy of praise and criticism.
But the common theme throughout is that the claims industry seems to benefit whichever way the wind blows and the rules need to be tightened.
My suggestion? Access to the Financial Ombudsman service must remain free to the consumer in order to ensure fair access to a complaints and redress service. However, if the claim is submitted via a compensation claims company, that company should share the risk of paying the Financial Ombudsman fees in the event that the complaint is rejected by the Financial Ombudsman. This would serve to give the financial services company a level playing field to defend those claims which it considers to be unjustified, knowing that if they successfully defend the claim then the compensation lawyers would foot the bill for the Financial Ombudsman fees. This would, I believe, make them think twice before speculating.
The claims industry is getting bigger and hungrier and is looking for the next big thing. Be careful, YOU and YOUR’s could be the next WONGA!
David Wylie, Director, LendingMetrics
This opinion blog post first appeared on LendingMetrics website.