Claims management companies (CMCs) are charging customers as much as 36% in commission on successful redress claims, it has emerged.
In recent years, the UK lending market has seen a wave of compensation claims from mis-sold loan products including payday loans, guarantor loans and other high-cost financial products.
The uphold rate for claims is very high, with around two-thirds of claims being approved and refunds ranging from just a few pounds to several thousands.
For CMCs, this is big business. The commission rate varies between CMCs with some charging far less than 36%, but they justify their fees by packaging up all the necessary documents needed and suggesting a better chance of approval by submitting a claim through their website.
A few years ago, Britons were told that they could claim back on a loan that they believed was mis-sold. This includes loans that they struggled to repay or where they have found themselves topping up loans and caught in a cycle of revolving credit, often without proper affordability checks. For high-cost loans such as payday loans, a simple loan of a few hundreds pounds can quickly turn into thousands very quickly if not repaid on time.
For UK lenders this has been very damaging and refunding millions of pounds worth of claims has seen some of the UK’s most well-known lenders fall into administration including Wonga, The Money Shop and QuickQuid.
Both individuals and CMCs can issue claims to the Financial Ombudsman to get a final decision on refunds – and often they are ruled in favour of the customer and the lender has to refund them accordingly.
This is where it gets even very expensive for lenders since any claim sent to the Financial Ombudsman incurs a £500 administration fee to the lender, regardless of whether the claim is approved or not.
“Charging 36% commission is immoral when people can submit claims for free”
Gary Jennison, chief executive of Amigo Loans, has criticised CMCs for charging large commissions for processing claims on behalf of former customers. Labour MP Yvonne Fovargue has labelled this ‘immoral’ on the basis that individuals can do this for free through the lender’s website, Debt Camel or MoneySavingExpert.
For a successful refund of £1,000, the CMC will earn £360 and the original claimant will receive £640, which some argue is too low for the customer.
Amigo Loans are currently undergoing a huge battle with the regulator over their backlog of claims, something that has seen the firm already pay out over £50 million to its former customers. The Bournemouth lender claims that having to refund the full amount of complaints outstanding would put the business into administration. Hence, the lender has proposed a redress scheme that gives former customers 5% to 10% of the overall refund owed – but this has been denied by the regulator.
Doorstep lender Provident Loans are currently in a similar position and are hoping to propose a redress scheme to customers to avoid insolvency.
What the experts are saying:
David Beard, founder of price comparison site, Lending Expert commented:
“Charging 36% of the overall refund amount certainly seems very high when claims can be submitted for free online – and this is something that should be encouraged.”
“Some of these customers would have really struggled financially in recent years and been caught in a real debt trap, having to borrow even more funds, asking family for money or declaring bankruptcy.”
“Being able to receive a refund is a big deal and the amount of money could be life-changing for some of the individuals. Some people may benefit from working with a CMC to better prepare their case, so commission could be justified, but it could perhaps be assessed on a case-by-case basis to help those who need it the most.”
Alfie Usher, founder of Forces Compare, commented:
“We are actively helping the military services and wider community to get refunds on mis-sold loans and other financial products such as catalogue finance.”
“Our campaign has shown that some customers really need help processing these claims and completing the documentation and administration involved. If they wait too long, they may miss the boat because some companies are rapidly becoming insolvent or offering fractional amounts through redress schemes.”
“Through a CMC, they can get all the necessary documentation completed the first-time around and we are likely to have a direct link to the lender.”
“We do not charge as much as 36% for a successful claim, but we also operate on a no-win, no fee basis and do not take commission if it is below a certain threshold.”
Dan Kettle, founder of loans provider, Pheabs, commented:
“For CMCs to earn 36% in commission for a customer’s refund feel very high – and it also acts as an incentive for them to market aggressively to get more claims and ultimately put other lenders out of business.”
“This is a very difficult period for lenders to operate in. On the one hand, UK lenders undergo huge processes to demonstrate that they are fit to authorise and fund loans, but on the other side, any customers that struggle to repay (which is inevitable) can get a full refund and compensation on top.”
“We are slowly seeing every big lender exit the industry and it questions who will be left – and does this play into the hands of unauthorised lending and loan sharks?”
“There is certainly an argument for more regulation or guidelines in this space in terms of who you can and cannot lend to and what you can and cannot claim for – otherwise the UK’s lending industry will pretty much become obsolete.”
Earlier this year, the Financial Conduct Authority proposed a price cap on the fees that CMCs can charge customers, limited to 30 per cent for redress worth less than £1,500, tapering off to 15 per cent for claims above £50,000. A final decision on price caps is not due until the autumn.