Opportunistic claims management companies are siphoning off up to a third of compensation cash paid to consumers and have already pocketed around £5 billion from PPI payouts, MPs have warned.
For years we have warned that using claims management companies (CMCs) to reclaim PPI is effectively throwning your money away. Our Reclaim PPI for Free guide shows you how to do it without spending a penny.
This compensation could – and should – have been paid to the victims of mis-selling.
More than 12 million people who've been mis-sold PPI have been paid over £22 billion in compensation since April 2011. However, a report by MPs on the Public Accounts Committee (PAC) published today has identified a new rogue claims industry that has built up around the PPI mis-selling scandal.
In the summary of its report, the PAC says: "We are disappointed that claims management companies have made up to £5 billion from payment protection insurance claims, out of compensation that should have been paid to victims of mis-selling by financial services firms".
If you go through a CMC to recoup PPI compensation, the CMC typically takes around a quarter or a third of your payout – but, importantly, you can bag yourself the full amount by instead personally making a complaint to the bank that mis-sold you PPI in the first place.
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How do I go about reclaiming PPI myself?
While it's straightforward and free to claim compensation, in 2014/15 80% of complaints to the Financial Ombudsman Service (FOS) about PPI were made through CMCs.
The view of MoneySavingExpert.com is that you should never pay a claims handler as you can easily reclaim £1,000s for free yourself.
Before starting, it's important to check your policy and see if your complaint's valid. The first step is to find out whether you had insurance on your account. Either write or phone the company that sold your loan and ask.
Step two involves checking you were given the correct information about exclusions and whether the policy was optional at the point of sale.
If you feel you were given dodgy information you should then write to or phone the company that sold the policy and ask for a refund.
If you don't receive a satisfactory response you can then consider contacting the FOS for free, which resolves disputes between consumers and financial firms – although the Public Accounts Committee has raised concerns about the service's backlog of cases.
Who's to blame for the rise of CMCs latching on to PPI?
The PAC report states that it's a "failure of the system of regulation and redress" that CMCs have been able to trouser large sums of money off the back of PPI compensation claimants.
It said departments and regulators have been "far too passive" in allowing compensation that could have gone to mis-selling victims instead going to CMCs.
MPs have urged the Financial Conduct Authority (FCA) and the Treasury to do more to find out how much mis-selling is still happening and identify which activities work best to prevent it.
However, while he is certainly no fan of CMCs and urges people to pursue PPI claims themselves, MSE founder Martin Lewis believes the banks that initially mis-sold PPI must shoulder much of the blame for the current state of affairs.
He says: "The biggest questions I get asked are 'how do I know if I had PPI and what do I do if I don't have the paperwork?' In those circumstances banks have made it far too difficult to find out whether they charged you for this product, often making people jump through ridiculous hoops such as data protection enquiries.
"This should have been solved years ago and plays right into the hands of CMCs, because anything that makes the process to find justice difficult runs the risk of scaring people off.
"Of course all the details of how to do it are available free, including on MoneySavingExpert.com, but people get worried about this type of difficult hassle having to invoke the Data Protection Act and it thus drives them into the arms of CMCs."
On the prospect of a PPI deadline, Martin adds: "If we are to have a PPI deadline in future, and that's something I firmly object to, then we have to get rid of some of these hideous barriers and restructure it. The best way would be that everyone who had had PPI would be sent a letter telling them that they have had it and how much and what the process is to then reclaim the money if you believe you were mis-sold."
Have CMCs been getting their claws into other areas of financial services?
The PAC believes there are "serious risks" of further mis-selling scandals erupting in the financial services industry.
It has warned that pension freedoms, introduced last year, which give people aged over 55 more choice over how to use their retirement pots, could be a "potential trigger" for future mis-selling on a mass scale.
The committee also highlighted recent upswings in complaints about packaged bank accounts, where consumers generally pay a monthly fee in return for a bundle of products and services included with a current account, as a potential area for concern about mis-selling.
What's the PAC proposing in terms of preventing mis-selling in the first place?
The committee has urged the Financial Conduct Authority to outline what it needs to do to improve the cultures of financial services firms and to report back on how effective this has been in a year's time.
It found a range of causes for products being mis-sold, from incompetent or intimidating sales teams to products that were badly-designed or unsuitable.
Middle managers in financial services firms were often promoted on the basis of sales targets, making it hard to keep the focus on consumers' needs, the PAC's report found.
The FCA should also set out what more it will do to ensure firms check consumers' understanding of products they buy and their rights to claim compensation, the committee said.
Additional reporting by the Press Association.