Would the rational consumer please stand up?

People are not always entirely rational. Of course we’re not. We have a right brain as well as a left brain, or at least most of us do, and for some of us the emotional part seems to dominate quite a lot of the time. Nonetheless, sometimes our actions appear to make little sense whichever part of the brain is in charge.

Take supermarkets.  The chances are most of us would say we would far rather shop in local stores, or at least that we want a vibrant and diverse high street, and yet most of us also jump into the car at the weekend and head off to the supermarket or, increasingly, get a brightly-coloured van to bring the supermarket to us. 

It may well be true, as one Tesco executive put it, that 'the consumer is the best regulator', but while people as consumers may well be completely rational beings, opting for the most cost-effective and convenient option, this takes little account of people as members of a community, or parents, or employees.

Which at least goes some way towards explaining why claims management companies (CMCs) have thrived while almost everyone seems to hate them.  To our rational selves it makes no sense that an industry so roundly reviled can be so successful, particularly when there are normally free alternatives to the services CMCs provide.

CMCs made their names (and their fortunes) encouraging us to claim injury compensation.  Largely thanks to claims firms' much derided daytime TV ads (‘if you’ve been injured in an accident that wasn’t your fault’), claimant personal injury lawyers find they have probably the worst press of any in the legal profession.

A recent survey by Consumer Intelligence found PI lawyers made consumers feel ‘annoyed’, ‘angry’ and ‘disgusted’ and no win-no fee agreements were commonly described as ‘scams’.  Not a happy situation for professionals who once upon a time could quite legitimately regard themselves as fighting for the rights of the underdog.

I should point out that, for the moment anyway, CMCs and personal injury law firms are not one and the same thing.  This is doubtless the reason why consumers have flocked to CMCs rather than taking their claims directly to lawyers: for better or worse, claims firms often display a far better understanding of consumers, or at least what prompts them to make a claim, than your average lawyer.

Thanks to a highly effective lobbying campaign by the insurance industry, imminent changes in the way no win-no-fee agreements operate have prompted CMCs to turn their attentions to claims for payment protection insurance (PPI) mis-selling.  That and the opportunity to make a quick buck.

There is a lot of taking the moral high ground when it comes to the claims industry and while I might admit to having a niggling sympathy for the plight of the PI lawyers who have had their reputations trashed by CMCs and who have been blindsided by an all-powerful insurance industry, it is impossible to think the banks have got anything other than their just desserts.

So far, they have had to put aside £12 billion to pay out compensation to consumers mis-sold PPI.  Naturally claims firms want to get their grossly oversized and thoroughly undeserved portion of it.  Banks call the CMCs ‘parasites’ (the words ‘pot’ and ‘kettle’ spring to mind) and accuse them of submitting thousands of bogus PPI claims.  CMCs claim it’s all the banks’ fault and they wouldn’t exist if the ‘ banks had played fair in the first place’, which is a bit disingenuous as I imagine they would find a way of persuading people to sell coals to Newcastle if they thought they could get a cut out of it. 

Mind you, they aren’t the only ones to blame.  You’d think after having had our collective fingers burned by the actions of CMCs over personal injury compensation and endowment mis-selling we’d be wise to their methods now and someone somewhere would be doing something to make sure we aren’t duped again. 

CMCs are now regulated, but arguably this has done little for consumer protection.   Citizens Advice has recently attacked the Ministry of Justice’s in-house regulator for not prosecuting any unauthorised CMCs and not restricting PPI-related cold calling or texting.

A survey of CAB advisers and consumers found that nine out of ten were plagued by claims firms, cold callers and text pests.  Worse, two thirds of consumers were subjected to high-pressure selling, more than a quarter were charged more than they expected and one in six had unauthorised fees taken from their bank account. 

Not since the bankers got rich on shifting money around ever-more-complicated investment schemes has an industry managed to make so much money out of producing nothing whatsoever of any worth.  CMCs are raking in huge profits by taking on average over a third of the value of a claim in fees, about £1,100 per case. 

It really is money for old rope because consumers can make perfectly valid claims on their own, for free and with at least as good a success rate as any claims management company.  But a lot of people don’t know that because the first they hear that they might have a claim is a personalised text message telling them to hurry or they’ll lose out on £3,477 in compensation.

There really is no such thing as a free lunch, but sometimes it looks all too possible, especially to those who are vulnerable and being mercilessly targeted by unscrupulous companies who know exactly where their vulnerabilities lie.  It behoves the rest of us to act a little more rationally and immediately press ‘delete’.

If you're looking for advice on your consumer rights, the Citizens Advice website is a great place to go. Their comprehensive guides and information cover various aspects of your consumer rights and may be able to give you the support you need.