New regulation in the claims industry will force firms to invest in technology or risk dropping out of the marketplace, says Simon Walker, financial services partner at KPMG.
In January, the Financial Conduct Authority (FCA) published proposals to introduce a fee price cap limiting the amount claims management companies (CMCs) are allowed to charge to no more than 15 to 30 percent depending on how much redress the consumer is due. The regulator estimates this could save consumers £9.6m a year.
“Reducing prices will cause firms to invest more in automation to make their processes simpler and to save money to maintain their profitability,” says Walker. “We could expect to see some firms drop out of the marketplace who are less efficient or effective.”
“The FCA’s recent fee cap proposal is severe, but not insurmountable for CMCs willing to embrace automation whilst simultaneously focusing on great customer service and adding value to their customers,” said Jemma Marshall, managing director at Allegiant Finance, in an email.
“The impact of the cap will be much more severe for CMCs engaged in high net claims such as pension mis-selling. Those who have based their remuneration structures on high commission rates will struggle to row back.”
Some consumers currently pay fees of more than 40 percent of the redress they receive, found the FCA.
Regulation will see improved competition in the claims market, says Walker. It will see the market become “more professional” and the “less ethical players will drop out of the marketplace”.
CMC’s will be required to disclose key information to consumers, as part of the proposals, such as providing more information about how the fees they pay will be calculated and better signposting to the free alternatives redress available.
This must be disclosed before consumers enter into a contract to help them make better-informed decisions about using the CMC’s services.
“As pricing becomes transparent, firms will seek to compete by improving services and other features that must be good for the consumer,” says Walker.
“The increase in consumer confidence in CMC fees will neutralise the negative effects,” said Marshall. “We find the biggest hurdle to onboarding customers is concern over fees and mistrust of CMCs. We believe the new regime will increase consumer confidence and in turn uptake. The risk is that CMCs with narrow margins may seek to make efficiency savings that in turn impacts customer service.”
Payment protection insurance (PPI) claims are excluded from the proposals as the FCA has already imposed a fee cap of 20 percent.
The end of PPI claims will see the size of the CMC marketplace shrink, says Walker. “You haven’t got that big volume of PPI complaints to feed the machine. There’s nothing quite the same scale.”
In December 2019, £332.4m was paid to customers who complained about the way they were sold PPI bringing the total amount to £38.3bn since January 2011, according to the FCA.
“It will be a big challenge to many CMCs that were running inefficient operations masked by the sheer income that could be earned from the prevalence of PPI claims” said Marshall.
A policy statement is expected to be published by the FCA in Autumn 2021 following the outcome of the open consultation which closes in April 2021.