In the last 12 months, the payment protection insurance (PPI) claims sector has exploded as customers increasingly become ‘clued up’ about their consumer rights.

This surge in ‘consumer know-how’ will come as little surprise, given the intense regulatory spotlight that has been shone on the PPI sector of late. Late last month, the Competition Commission pulled the curtain on its 23-month investigation into the sale of the controversial insurance product. The independent public body has taken a firm stance in attempting to introduce more competition into the sector and rid it of inherent financial mis-selling practices that have generated so many consumer claims.

By 2010, banks and lenders will not be able to sell the product to consumers alongside credit agreements, or for seven days afterwards, with a complete ban on the sale of single premium policies.

The reforms follow the announcement by the Financial Ombudsman Service (FOS) in late 2008 that it has experienced a substantial increase in the level of complaints regarding PPI. Many consumers now believe that the PPI they were sold on the back of loans and credit may have been inappropriate to their individual needs.

Some PPI providers have said the reforms cannot come soon enough, while most high street banks had already pledged to halt sales of single premium PPI by the end of January, when the commission announced its ban on sales of that product.

In a statement, Walter Merricks, chief ombudsman at the FOS, said that the organisation would need to take this rise in complaints into account during its budget planning process for the coming financial year – an indication that it expects the PPI claims market to expand rapidly.

The emergence of this sector – and that of the ‘savvy’ man on the street – has opened a previously untouched door for solicitors and conveyancers alike.

Each year, more than 7.5 million PPI policies are purchased in this country – worth more than £5.5bn (source: Datamonitor, 2005). In the first three months of 2008, the number of complaints received by the FOS was more than in the whole of 2007, indicating a changing landscape in the PPI claims sector. The number of complaints relating to PPI increased dramatically to 10,652 for the year ended 31 March 2008, compared to 1,832 in the previous financial year. The FOS is so concerned that it has referred these figures to the Financial Services Authority, demanding that this issue be investigated.

It’s little wonder that regulators are raising an eyebrow in concern, and solicitors are raising another. PPI – which provides an income to maintain a borrower’s debt repayments in the event of an accident or sickness – is worth its weight in gold to financial institutions selling the product. The 12 largest distributors of PPI made profits in excess of the cost of capital of £1.4bn in 2006, on their combined gross written premium (GWP) of £3.5bn, according to the commission’s report, The Market Investigation into Payment Protection Insurance, published in June last year. This represented a return on equity (RoE) of 490%, with typical commission rates at 50-80% for personal loan and credit card PPI. When you consider that between 11% and 28% of GWP is paid out in claims, compared to claims rates that can be more than five times as high in household and motor insurance, it certainly is worth its weight in gold.

To date, companies have faced little or no competition when selling PPI to their credit customers and, as a result, consumers appear to have been overcharged by over £1.4bn, says the commission. The selling of this insurance has subsequently come under increased scrutiny from the FSA, the FOS, the Office of Fair Trading and the commission. There really isn’t anywhere for financial institutions to hide and it is time solicitors began to reap the rich rewards that are beginning to flow from this sector.

How can solicitors succeed in this very lucrative market? Tens of thousands of customers are seeking compensation from lenders and financial services providers, accused of mis-selling policies covering loans, pensions and mortgages. With providers’ claims ratio being so low, consumers need a professional and litigious steer to help them succeed in the pursuit of a claim. PPI can be mis-sold in over 100 different ways and financial mis-selling claims can be made on policies dating back up to six years. This means the process of making a claim is often lengthy and complex. Also, if the claim dates back to before 2005 – when the FSA was appointed as regulator of the financial services sector – then the ombudsman does not have jurisdiction to deal with the complaint.

The legal profession, therefore, is ideally placed to pick up the baton, increase the number of successful claims, and with it create fresh revenue streams.

Increasing numbers of solicitors and conveyancers are opting to diversify their portfolios as other markets continue to suffer due to economic pressures and tighter regulation. Despite the number of PPI claims growing significantly, the sector is still very much at an embryonic stage. While it offers plenty of opportunity for the legal profession, my opinion is that the only way to succeed is to have a firm knowledge of the sector, be able to identify key points in a financial mis-selling claim, and understand what makes a strong case.

Increasingly, solicitors and claims management companies (CMCs) are collaborating to ensure a high level of successful claims.

Solicitors can offer the claimant a more comprehensive approach. They will have an increased number of legal angles when approaching a claim; they will have more litigation techniques in their armoury than the FOS; and they should be able to gain a thorough understanding of the Consumer Credit Act.

Solicitors will be treading new ground in this area, but the transition will be a straightforward one. CMCs, such as the Financial Claims Service (FCS), are there to offer expertise and ‘hand-holding’ without being intrusive. Areas of training solicitors will need include: financial services regulation; conditional fee arrangements; unenforceability of agreements; how to comply with the Consumer Credit Act; relevant case law; and knowledge on how to secure an early settlement. With continuing professional development points also on offer through training schemes, gaining the right knowledge and expertise in PPI claims handling could provide a useful revenue stream for solicitors in a difficult year.

Daniella Lipszyc is a commercial litigation solicitor and PPI training and development co-ordinator at training firm Ultimate Law