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Fee cap now in force for claims firms

Paloma Kubiak
Written By:
Paloma Kubiak
Posted:
Updated:
01/03/2022

Customers who use claims firms for redress will be able to keep a bigger chunk of their cash as a fee cap on excessive charges applies from today.

From today, claims management companies (CMCs) will be prevented from charging excessive fees to people using their services for compensation payments.

The regulator, the Financial Conduct Authority (FCA), said the move is expected to save customers £9.6m a year and thousands of pounds on some individual claims.

Under the new rules, the maximum charge is based on the value of the redress due, with the limit between 15% and 30% of a claim:

  • Band 1 – redress up to £1,499 – max 30% charge or £420, whichever is lower
  • Band 2 – redress between £1,500 and £9,999 – max 28% charge (£2,500)
  • Band 3 – redress between £10,000 and £24,999 – max 25% charge (£5,000)
  • Band 4 – redress between £25,000 and £49,999 – max 20% charge (£7,500)
  • Band 5 – redress from £50,000 – max 15% charge (£10,000).

Previously a couple using a CMC were told they would be awarded £56,447 for their mis-sold investment. But after the 48% CMC fee (including VAT), they paid £27,000 in fees to the firm.

Under the fee cap, the couple would pay £10,000, saving them £17,000 in fees, the FCA said.

It applies to most claims where a customer is awarded monetary redress from a financial services firm, either directly from a firm, via the Financial Ombudsman Service or if it’s gone bust, from the Financial Services Compensation Scheme.

For other financial services claims, the rules require charges to be ‘reasonable’. The new rules do not apply to PPI claims which are already subject to a 20% cap, set by parliament.

Further, it only applies to claims relating to new contracts entered into from 1 March 2022, generally excluding pre-existing contracts already in place.

CMCs are also required to disclose key information such as details of how fees will be calculated and they’re required to signpost customers to free alternative routes to redress, before a contract is signed.

The move comes after the city regulator first announced a fee cap proposal in January 2021.

Sheldon Mills, executive director of consumers and competition at the FCA, said: “Our rules protect consumers from losing a significant amount of their compensation in excessive fees, particularly when there are ways for them to make claims without incurring any fees.

“The changes are part of our ongoing work to drive a fundamental shift in industry mindset so we can stop consumer harm before it happens, and to ensure more consistent standards of protection.”