The Financial Conduct Authority estimates the changes will collectively save people around £9.6m per year.
01 March 2022
People using claims management firms will be protected from excessive amounts of their compensation being swallowed up by fees, under new rules.
The changes brought into force on Tuesday by the Financial Conduct Authority (FCA) will cap the costs paid by consumers.
The FCA estimates the changes will collectively save people around £9.6 million per year.
The maximum companies are allowed to charge depends on the size of the compensation payouts consumers are due.
For example, if the redress amount is between £1 and £1,499, consumers can only be charged a maximum of 30% of their claim, or £420, whichever is lower.
If the amount is between £1, 500 and £9,999, the maximum charge is the lowest out of 28% or £2,500.
For an award of £10,000 to £24,999, a maximum of the lower of 25% or £5,000 must be charged.
In the £25,000 to £49,999 bracket, the maximum charge is the lowest out of 20% or £7,500.
And for compensation awards of £50,000-plus, the maximum charge is the lowest of 15% or £10,000.
The new rules apply to claims relating to new contracts entered into from March 1 2022 and generally exclude contracts already in place, the FCA said.
The cap will apply to most claims where a consumer is awarded monetary redress from a financial services firm, either directly from a company, via the Financial Ombudsman Service (FOS) or, if a firm has gone out of business, from the Financial Services Compensation Scheme (FSCS).
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.
Claims management firms must also disclose key information to consumers before entering a contract, such as detailing how fees will be calculated and making sure people are aware of the free routes to redress available.
For example, people can complain to the FOS themselves free of charge and keep all compensation due, if any is awarded.
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.”