The public spending watchdog estimates claims management companies have pocketed £5bn from payment protection insurance (PPI) compensation – almost a quarter of the money paid out.
The National Audit Office (NAO) issued the finding in a report examining regulation and redress in the financial services sector.
It called into question whether there had been a clear reduction in mis-selling and if the City regulator was offering value for money.
The NAO cited worries among consumers about stress for the popularity of claims firms for the recovery of PPI cash.
It said that of the £22.2bn paid out to more than 12 million bank customers, claims firms – which advertised extensively – had pocketed up to £5bn.
Customers who feel they were wrongly sold PPI can put in a submission for compensation directly, for free, and banks have been forced to reexamine thousands of claims they had initially dismissed.
But the NAO reported a backlog with the Financial Ombudsman Service of 40,000 cases – with complaints taking three times longer to complete now than they did back in 2011.
Amid worries in some quarters that the Government”s pension reforms could trigger the next wave of mis-selling claims, the NAO said it was yet to see evidence that the Financial Conduct Authority”s (FCA”s) efforts to tackle mis-selling were bearing fruit.
A row broke out at the end of last year when it emerged the FCA had shelved a planned review of banking culture.
Its new chief executive Andrew Bailey – currently the head of another financial regulator – has since signalled a softer approach to regulation will be taken under his tenure.
The NAO put the total operating cost of the FCA – funded by the firms they regulate – at £523m in the 2014/15 financial year.
NAO head Amyas Morse said: “Legislative restrictions limit my access to information that the FCA holds on firms, making it impossible to draw definitive conclusions on its approach.
“The information my staff could see, such as customer complaints, does not show any clear reduction in the extent of mis-selling.
“The FCA cannot be confident that its actions are reducing the overall level of mis-selling, and it has further to go to show it is achieving value for money.”
The FCA said: “It is unlikely that mis-selling could ever be eliminated completely. Our aim is to avoid and minimise it as far as possible, create the right incentives and culture in firms and to ensure appropriate redress for consumers and regulatory penalties for poor conduct are put in place when it occurs.”