Mortgage customers who think they have a claim should be cautious of no win, no fee firms – and instead go direct to the Financial Ombudsman Service

Claims farmers – companies offering to pursue compensation claims on behalf of consumers on a no win, no fee basis – have begun approaching homeowners who believe they have been mis-sold mortgages.

The Financial Services Authority has been conducting a clampdown on irresponsible lending and last week confirmed it was investigating a second firm over questionable mortgage lending practices following last month’s £840,000 fine of DB Mortgages, part of the Deutsche Bank Group.

The move has prompted Brunel Franklin – a claims management company that says it has recovered £150m compensation for customers who have been mis-sold endowments and payment protection insurance policies over the past 10 years – to launch its “consumer mortgage mis-selling scheme” for a 30% cut of any compensation recovered.

The DB Mortgages action was the first time the FSA had taken enforcement action against a firm for irresponsible mortgage lending. “Firms which fail in their obligations to customers should expect not only a substantial fine but also that they will have to pay back customers who have and been disadvantaged by their failings,” warned Margaret Cole, the FSA’s managing director of enforcement and financial crime.

The consumer group Which? advises consumers to steer clear of claims companies and take cases directly to the Financial Ombudsman Service (FOS).

“There is a developing trend. Payment protection insurance policies and endowments have hit their peak, and claims companies are looking for the next thing to get their teeth stuck into,” says James Daley, editor of Which? Money. “People should give these companies a wide berth.”

Citizens Advice also advises homeowners to think twice before unnecessarily signing up with a claims company. “Up until 2008 we were seeing lots of evidence of irresponsible lending – people being lent mortgages they could never properly afford and unsuitable lending with people being given products that weren’t necessarily right for them – and a lot of the problems were driven by intermediaries,” says Citizens Advice’s social policy officer Peter Tutton. “It was only a matter of time before the claims management industry started moving in.”

An FOS spokeswoman points out that its complaints service is free if a consumer has first made a complaint to the lender or intermediary but is unhappy with the response: “Consumers don’t need to pay to get their complaint resolved. If they choose to use a claims company, or other third party, the ombudsman service will deal with the complaint in exactly the same way.”

Sally Bowyer, managing director of Brunel Franklin, acknowledges that many people will be able to handle their own claims. “But our experience is that people haven’t the time or stomach for the fight and, because of the hassle, they will choose a service like ours,” she says. “When a complaint gets technical, it’s better for it to be dealt with by experts rather than fight it on your own.”

Whilst Brunel Franklin styles itself as “a leading consumer champion”, 80% of its current business relates to PPI claims. Bowyer said it was too early to talk about typical payouts, but a claims handler on its advice line said: “We haven’t won one yet, but we predict the average claim to be between £5,000 and £6,000.”

“That’s not an enormous amount,” says Daley. “If that’s your claim, you would do perfectly well to take your claim through the FOS. It is a perfectly good system.” Brunel Franklin charges 25% plus VAT for all its services.

Angus Nurse, research fellow at Lincoln Law School, has tracked the progress of claims companies. “They began handling accident claims, moved into endowment and PPI; mortgage mis-selling is the latest area,” he says, adding that there are two models. “They act for you and take a slice of any compensation or pass your claim on to a solicitor who pays a referral fee for your case – and take a slice. If consumers aren’t aware of their rights and the maximum amount of compensation they can recover free of charge, that’s a concern.”

However, Nurse (who used to work for the local government ombudsman) points out that it “shouldn’t be underestimated how uncomfortable some people are dealing with officialdom, how daunted by process they can be. Some people might think it worth giving 25% plus VAT of the claim to have someone else do it. Equally, claims companies can take advantage of that.” Consumers should be aware that when pursuing a claim under a scheme like FOS “most of the work is done for you”, he said.

While regulated by the Ministry of Justice since 2007, the claims management sector still has “some pretty shocking practices”, says Tutton, citing mass cold-calling, unsolicited marketing and taking fees before doing work.

Citizens Advice has seen cases where claimants have ended up out of pocket despite “winning” compensation from their lender, because that money was set against what they owed to the lender. “They haven’t had the cash so ended up with a debt to the claims company. We need to make sure those kind of practices don’t spread.”

FOS reports that eight out of 10 of all PPI claims it presently receives are from claims companies, and that PPI claims have a success rate of 89%.

David Foster, a mortgage litigation specialist at the law firm Barlow Robins, advises borrowers to go to a lawyer for free initial advice. If there is a case that needs specialist legal input they should be able to be advised by a lawyer on a “no win, no fee” basis where the lawyer guarantees that the client receives 100%. “If a lawyer is successful and, if the claim is over £5,000, they should get the majority of their costs paid by the other side,” he says. “If the claim is below £5,000 – and it may well be it is – then consumers really should be able to do it for themselves through FOS.”

Financial Ombudsman Service financial-ombudsman.org.uk; helpline 0800 0 234 567 or 0300 123 9 123 for mobiles.