However, many consumers have opted to get their refund with the help of a professional claims service, which for those already on a debt management plan may cause a problem.
Payment protection insurance, or PPI as it is more commonly known, has been the subject of a battle between consumers, the banks and the Financial Ombudsman Service (FOS). The FOS judged that thousands of customers who complained had been mis-sold the cover but the banks disagreed with the criteria used by the Ombudsman. The case made it all the way to court where the case was decided in favour of the consumers and banks were ordered to pay out compensation.
Some banks have been more helpful than others in dealing with claims for a PPI refund, with Barclays announcing they would simply pay out each case rather than spend time and money on lengthy investigations.
And the outcome of the court case was doubly harmful for banks – not only were they forced to pay claims they disagreed with, they have been forced to contact customers who could potentially have suffered a mis-sale, to advise them of their rights to reclaim the money. The Financial Services Authority recently issued an instruction to banks, to remind 12 million people that there could be a refund waiting for them.
The banking industry is expected to have to shell out as much as £9 billion in claims for PPI refunds
However, many consumers have been seduced by the adverts of professional claims management companies, which boast that they can obtain a payout more effectively than an individual submitting a claim by themselves. In fact, according to data from the Financial Services Compensation Scheme, as many as three out of four claims for PPI are dealt with by a claims management company.
Many individuals opt to allow a claims management company to handle their claim, but the FSCS says this only increases the chances of a successful payout by 4%.
It is undeniably easier and less stressful to allow a professional claims firm to handle the claim and certainly one of the reasons why many people opt to hand their case over, even though this means sacrificing a chunk of the compensation.
The fee charged by professional firms is taken out of any settlement cheque, which means that consumers do not have to actually pay out any cash. This can make it easier to overlook the fee charged for the service which, in some cases, can be as high as 40% of the settlement.
However, individuals in arrears with their finance company may find that they end up owing money due to a misunderstanding about how payment will be made.
In most cases, when a claim for PPI is settled, the individual is sent a cheque in full and final payment of their case. This will be sent via the claims management company, which deducts its fee before sending the balance to the consumer.
But for those on a debt management plan or in arrears with their bank may find that their claim is treated entirely differently.
Rather than send a cheque in payment, banks may well knock off an amount equal to the refund from the balance outstanding on the debt. This means that an individual’s finances will improve as they will have less to pay off, making it quicker for them to clear their arrears.
Unfortunately, whilst this is good news, it means that the individual is left with a bill from the claims management company, which they will need to pay out of their own pocket. If this wasn’t made clear at the outset, it can mean cash-strapped individuals are simply adding to their list of creditors and could end up in a worse position than they started with.
Any debts which are due to claims management companies are considered in law as unregulated debts, because they relate to a service which was not absolutely essential. This means that there are far more options open for the company to enforce payment, including bailiff action, as well as court orders.
However, the possibility of running up further debts shouldn’t mean that if you are on a debt management plan you should forget about claiming the PPI refund you are entitled to. However, if you choose to use a claims management firm, you should make sure you know how much the fees will be before you start the process and make sure you have the funds to meet the costs. If you don’t have spare cash to pay for professional help, try submitting a claim for PPI yourself. Many individuals make successful claims without assistance and you may actually find the process is far easier than you anticipated.
Baines and Ernst is a professional financial services company offering help and advice to people in debt – including Debt Management Plans and Debt Relief Orders.