Are claims management companies the champions of consumer rights or merely opportunistic vultures? Public opinion is divided on these firms, heavily influenced by whether they are seen as aiding or opposing individual consumers.

Their role is especially prominent now, as banks and dealerships encounter a flood of claims regarding mis-sold car loans stretching back two decades.

Market speculation suggests that lending institutions may face compensation costs soaring to an estimated £30 billion, according to recent assessments from Moody’s. This predicament follows increased scrutiny from the Financial Conduct Authority (FCA) and a recent ruling by the Court of Appeal.

Claims management entities, often including legal firms, represent clients on a “no win, no fee” basis, operating with a savvy marketing approach and adeptness in search engine optimization.

A search for “car loan compensation” on Google reveals a range of enticing headlines, such as “Check if you’re owed £4,000” or “You might receive £1,000s.” Presently, these companies are responsible for the majority of complaints reported by lenders; the FCA reveals that upwards of 90 percent of motor finance grievances involve some level of legal representation.

This scenario mirrors the payment protection insurance (PPI) compensation saga from a decade ago, which resulted in banks incurring costs of approximately £50 billion. While some firms remain the same, others have shifted identities.

According to insiders in the sector, prominent claims companies currently include CEL Solicitors, Pogust Goodhead, Barings Law, and KP Law, although they often operate under various trading names, with additional activity from Slater & Gordon, Bott & Co, Courmacs Legal, and HD Law.

A significant change compared to the PPI crisis is that many claims firms have restructured to evade FCA regulation, which imposes strict rules regarding fees and conduct. Instead, these companies are primarily overseen by the Solicitors Regulation Authority, which employs a less rigorous regulatory framework. One banker noted, “This indicates a large-scale regulatory arbitrage.”

Some claims management firms operate solely online, collecting customer leads and forwarding them to law firms for referral fees. Such companies are often secretive about their ownership and operations, frequently existing below the threshold that necessitates audited financial statements.

Litigation funders also play a vital role, providing upfront investment due to the lengthy nature of legal cases. Law firms frequently seek funding from these deep-pocketed investors, with examples including KP Law’s ownership by Asertis and Slater & Gordon by Anchorage Capital.

The number of litigation funders in the UK has significantly increased from 16 to 73 within the last five years, as reported by Fair Civil Justice, which advocates for greater regulation and accountability in the sector.

In 2010, assets under management in the litigation funding industry totalled merely £6 million; currently, that figure has surged to £2.2 billion.

Seema Kennedy, the head of Fair Civil Justice and a former government minister, has expressed concerns about the opacity within the industry. “It’s not regulated, there’s no fiduciary duty, and funders’ identities remain undisclosed in court,” she stated.

She warned of potential ramifications where lenders might halt car financing altogether, ultimately leading to increased costs for consumers and potentially tarnishing the UK’s investment reputation.

The source of funding often eludes scrutiny, as many are shrouded in confidentiality laws from offshore locations like the Cayman Islands, with speculation linking them to hedge funds or affluent individuals.

Proponents of these firms argue that the high initial costs associated with litigation make their services invaluable, allowing claimants to navigate the process without financial risk. However, banks counter that individuals could pursue claims independently, retaining a greater share of their compensation. Generally, claims management companies charge around 30 percent of the payout plus VAT, which can equate to 36 percent of the total compensation being consumed by fees.

Martin Lewis, the founder of the Money Saving Expert website, has created a tool allowing car buyers to circumvent these firms, empowering over two and a half million users to submit their own claims.

Data from the Financial Ombudsman Service indicates that individuals who manage their own claims experience higher success rates compared to those who utilize claims management companies.

Banks have expressed frustration regarding some management companies’ aggressive claim strategies, citing instances of submissions made without client consent and duplicate claims targeting all lenders listed in a borrower’s credit record. One banker remarked that these companies often submit numerous claims in the hope that at least a few will prove successful.

Adrian Dally, director of motor finance at the Finance & Leasing Association, criticized claims management companies for prioritizing volume over individual consumer interest, asserting that their sole focus is on maximizing complaint submissions.

In a recent House of Lords committee session, Stephen Haddrill, director-general of the association, emphasized the financial and emotional toll caused by the increased number of claims, highlighting its potential implications for investor confidence in the industry.

Banks argue that the current system disproportionately favors claims management companies. Under existing rules, these firms can bring cases to the ombudsman without incurring fees, while the banks must remit £650 per case, regardless of the decision. This arrangement facilitates claims management companies in filing extensive claims, while amplifying the financial burden for the accused firms.

The ombudsman aims to rectify this imbalance through proposed changes requiring parliamentary and regulatory approval, which would limit claims management companies to ten free submissions per year, with subsequent cases incurring £250 per claim, reducing to £75 if a complaint is upheld. If a claim is dismissed, the initial £650 fee charged to the firm would be lowered to £475.

This initiative aligns with broader efforts under the current government to revise financial services regulation, a topic raised by Chancellor Rachel Reeves, who described prior measures taken post-2007-09 crisis as excessive. The proposed reforms aim to streamline the consumer compensation process within financial services to foster a more favorable landscape for future investment.

Claims management firms maintain that they are unfairly targeted. Lizzie Comley, COO of Slater & Gordon, argued, “People deserve justice for the wrongs they’ve experienced, and we simplify the process.”

In response to accusations of a scattershot approach, Comley dismisses such claims, asserting, “We thoroughly vet all submissions. The true delay comes from the banks’ reluctance to resolve issues promptly.” Currently, Slater & Gordon is managing tens of thousands of motor finance complaints, although Comley indicates they have yet to reach PPI-level demand.

The two primary concerns in the car loan mis-selling situation stem from the FCA’s expressed apprehensions regarding discretionary commissions paid by finance lenders to car dealers. The FCA prohibited these payments, which incentivized pricier loans, in early 2021, intensifying its scrutiny in January with a sweeping review tracing back to April 2007. The regulatory body continues investigations and plans to disclose further steps in May.

Additionally, a recent Court of Appeal decision expanded the scope of the issues to include all types of vehicle loan commissions, ruling that undisclosed or partially revealed commissions are illegal and mandating lenders to refund impacted consumers.

While this ruling could significantly broaden litigation possibilities, the industry may experience substantial shifts depending on the outcomes of appeals filed by Close Brothers and FirstRand in the Supreme Court. Until then, uncertainties loom over the sector.

If Moody’s £30 billion estimate proves accurate, the claims sector may anticipate substantial financial rewards, potentially resulting in £21 billion allotted to compensating affected car buyers, with claims management companies and their undisclosed sponsors reaping the remaining up to £9 billion.