Claims management companies could be forced to compensate for poor service from 2013

Any complaints against CMCs – companies which handle claims for compensation on behalf of consumers in exchange for a fee – could result in compensation for consumers under the new system, as the Ombudsman has the legal power to ensure compensation is paid where appropriate. Currently, the "thousands" of consumers who have been let down by the "small number" of poorly-performing CMCs take their complaints to the Claims Management Regulator (CMR), part of the Ministry of Justice (MoJ).

The Government said that the change will enable the CMR Unit to "refocus its resources on working with the claims management industry to improve standards" and to "take wider action against CMCs who consistently breach the rules". It will continue to handle complaints until the new service takes effect, which the Law Society Gazette reported would be from April 2013.

Kevin Rousell, head of claims management regulation with the MoJ, said that the change was "yet another tool to help stamp out malpractice" in the claims management industry. The Government is currently consulting on strengthened rules for CMCs including a ban on oral contracts. Companies will also have to state that they are regulated by the CMR Unit rather than the MoJ, and will have to inform their customers if their authorisation is suspended or changed.

The Legal Ombudsman was set up in 2010 and is a free service that investigates complaints made by members of the public and "very small businesses" against the legal profession. The Legal Services Act, which established the scheme, allows it to be extended to claims management services. The Ombudsman can currently award compensation of up to £30,000.

"This is great news for the public and consumers as we have significant powers of redress to help protect them," said Adam Sampson, chief Legal Ombudsman. "We are confident we can support the claims management regulator to improve standards across the industry. Our priority now is to ensure we're ready to start accepting complaints once all the necessary arrangements are in place."

Consumer protection watchdogs have called on the Government to crack down on CMCs, which typically charge 25% of any compensation entitlement plus VAT to consumers who use their services. According to a survey of over 2,000 people carried out by Which? and MoneySavingExpert.com earlier this year, only 49% of respondents knew that using a CMC would be no more successful than bringing a claim on their own, for free, while two thirds of the people surveyed had received unsolicited phone calls or nuisance text messages from CMCs - usually about payment protection insurance (PPI).

The CMR Unit cancelled or suspended the licences of more than 400 CMCs over the past twelve months, according to its annual report published earlier this month. It shut down 260 of the 409 poor practising CMCs it investigated in that period.

The regulator does not, however, have the power to compensate consumers.