Claims management companies will have to highlight the free alternatives available to consumers before they sign up under plans set out by the City regulator.
The Financial Conduct Authority (FCA) has published draft rules outlining how it will regulate claims management companies (CMCs) when regulation passes to it next year.
On April 1 2019 the FCA will become the regulator of CMCs established or serving customers in England, Wales and Scotland.
At the same time the Financial Ombudsman Service (FOS) will become responsible for resolving disputes about CMCs.
Concerns have been raised that customers are not always aware of the total charges they will pay, what the CMC will do for them and what they must do themselves or how they can make a claim without being charged.
The FCA is proposing that, before a CMC agrees a contract with a customer, they will need to give them a short summary document.
This will include an illustration or estimate of fees, an overview of the services the CMC will provide and the tasks customers will need to undertake themselves.
The FCA's proposals will also mean CMCs will also need to highlight free alternatives, such as ombudsmen schemes, in marketing material and pre-contract disclosures.
Some people have used CMCs to claim PPI (payment protection insurance) compensation in recent years - and while these firms will take a chunk of any payout, there is plenty of free help available for making a claim, for example from the FOS as well as from consumer help bodies such as MoneySavingExpert.com, Citizens Advice and Which?
Under the FCA's plans, CMCs would need to highlight the relevant statutory ombudsman or compensation scheme as free sources of help for consumers.
A National Audit Office report in 2016 said claims management firms were estimated to have taken between £3.8 billion and £5 billion of the £22.2 billion of PPI compensation paid out between April 2011 and November 2015.
As well as claims related to financial services, people also use CMCs in other circumstances, such as in relation to injuries.
The FCA is also proposing that CMCs will have to record and keep all calls with customers for at least 12 months.
Andrew Bailey, chief executive of the FCA said: "A well-functioning claims management sector can help to provide justice and redress to people who have suffered harm.
"But the market doesn't always work as it should and poor conduct persists across the sector.
"We want CMCs to be trusted providers of high quality, good value services that can truly help consumers.
"A key element of our approach to regulation will be ensuring that consumers are both protected and treated fairly.
"The proposals we have outlined today are integral to achieving that aim."
The Financial Guidance and Claims Act 2018 enables the transfer of regulation of CMCs to the FCA from the existing Claims Management Regulator, and extends regulation to Scotland.
A consultation on the FCA's proposals for how it plans to regulate CMCs closes on August 3.