Trapped and charged to leave: Britain’s claims firms are cashing in on consumers who just want out, and it needs to stop
Access to justice should never come with a trapdoor. Yet that is exactly what tens of thousands of British consumers are discovering when they try to exit badly managed class action claims.
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The culprit? Exit fees, excessive charges that have turned what should be a consumer right into a financial prison.
Mass claims are propping up across Britain, from Dieselgate to data breach claims or motor finance mis-selling. Legal and claims firms recruit thousands to take on companies. The model requires volume: the more people who sign up, the bigger the potential damages, the more attractive the case becomes to funders.
But customers often have reason to withdraw. Aggressive marketing leads consumers to sign up with multiple firms without realising, making all their claims invalid. They may also discover they can claim for free, that a Government redress scheme makes representation unnecessary, or simply be disappointed with the process.
That’s when they discover the exit fee, undisclosed charges for work that has not been done. Escape comes at a price.
Last week, the Financial Conduct Authority and Solicitors Regulation Authority issued a joint warning about these practices. Their intervention was overdue. Following scrutiny, two claims management companies agreed to change their termination policies, protecting 70,000 consumers from excessive fees.
What’s more, the FCA made it clear that consumers do not need to use a claims management company or law firm to claim compensation, and they could lose a significant chunk of any money they are owed if they do. Yet 41 per cent of those eligible didn’t know they could claim for free. That chunk? Around 30 per cent of compensation.
With an influx of cases being pushed on the consumer, including complex data protection claims against hacked businesses like the Co-op and M&S, firms are expanding their reach and squeezing profits out of British businesses more than ever.
Now exit fees add another layer of confusion. Claims firms can engage in sloppy onboarding, knowing that even if clients want to leave, they will be charged. Social media marketing and lead generation websites convince consumers to sign up, each charging their own fee when the consumer is forced to leave.
This creates perverse incentives. Firms engage in poor due diligence, knowing exit fees will trap clients. Marketing companies use scattergun approaches, safe in the knowledge that consumers who sign up multiple times will struggle to untangle themselves. Meanwhile, funders maintain their portfolios even when clients are dissatisfied.
The SRA has made clear that exit fees must be reasonable, proportionate to work actually done, and clearly set out in the original agreement.
The FCA has already required nine law firms to better disclose exit fees, but this regulation cannot be extended to associated advertising campaign sites like “Join the Claim”, despite warnings from the Advertising Standards Authority.
The regulators are right to intervene, but warnings alone will not fix a broken business model. Parliament must act.
Exit fees should be banned entirely if consumers were not told they could claim separately for free. If firms failed to disclose that legal representation was optional, they have no right to charge people for leaving.
Where firms failed basic due diligence, such as checking consumers were not already represented, exit fees should likewise be banned. You should not charge clients to fix your mistakes.
Where exit fees are legitimate, they must be capped at levels proportionate to the work that has actually been done. The current approach, firms charging what they think they can extract, cannot continue.
The Government has promised to implement a new framework for third party funding and collective actions to enhance claimant protection and transparency. Banning exit fees should be part of that regime.
The industry will argue that restricting exit fees will hurt their business models, but if your business depends on preventing clients from leaving, it should not be protected at all.
Access to justice matters. So does the freedom to walk away from bad representation without facing punitive charges.
If the regulators’ warnings do not produce swift industry reform, Parliament should step in with legislation. Consumers deserve a legal system that empowers them, not one that holds them hostage.
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Oliver Ryan is the MP for Burnley.
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