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Referral fees and access to justice

Maybe this has passed you by but there has been a particularly fraught and somewhat unenlightening debate about banning ‘referral fees’: these are payments made by lawyers to claims management companies and others for identifying accident victims with a potential legal claim. The debate was kick-started by Jack Straw, MP for Blackburn when he attacked ‘high-pressure sales techniques’ that have ‘led to a phenomenal growth in the number and value of claims for personal injury’.

‘Referrals’ are defined by the Solicitor Regulation Authority’s Code of Conduct 2011 as ‘any situation in which another person, business or organisation introduces or refers a client to your business, recommends your business to a client or otherwise puts you and a client in touch with each other’.

The definition is fairly simple to understand.  It is also standard business practice for everyone from insurance brokers to car sales franchises and comparison sites. So why, if the payment of these fees is ordinary business practice, does payment for legal introductions become the subject of newspaper headlines and political outrage and what – if anything – does that mean to the consumer?

To answer this question I think it’s helpful to set out some background. Prior to 2000 legal aid was generally available to accident victims. New Labour scrapped public funding for personal injury claims and, in its place, revamped the ‘no win, no fee’ model – known by lawyers as conditional fee agreements – under its Access Justice Act 1999. See here.

Law firms were banned by their regulatory body, the Law Society from paying referral fees. Non-lawyer claims management companies (notably The Accident Group and Claims Direct) began marketing to claimants the right to bring claims and passing the claims through to lawyers through complicated funding mechanisms which involved large insurance premiums and payments for other services as a way of recovering their marketing spend and profiting from their activities.  Both companies went bust by April 2004 and were roundly attacked by consumer groups – see here.

The Law Society, under pressure from the Office of Fair Trading, in 2004 overturned a previous decision allowing its members to pay referral fees. Alongside these changes, the activities of claims companies have come under increasing scrutiny and the Government intervened to regulate the sector.

So, back to the present: lawyers pay referral fees for new work. For the purpose of this article, I’m looking at accident claims.

Many of the arguments against referral fees focus on the conduct of those making the referrals be it claims companies, insurers (who are not regulated by the Ministry of Justice which oversees the regulation of claims companies but the Financial Services Authority) or other organisations such trade unions, advice groups or even car hire companies.  It is argued that the payment of fees distorts the reasons for making the referral and so the referral will be made because of the money paid and not the quality of service.  Consequently the solicitor’s independence is undermined as they become dependent on the supplier of business and that ultimately is bad for the consumer and morally and legally questionable. The consumer has become nothing more than a commodity traded to the highest bidder.

There is also a very strong push by insurers to say, and this appears to be endorsed by government, that the activities of businesses making referrals are increasing the cost of insurance pay-outs and also increasing the number of unnecessary or unworthy claims passing on increased cost to consumers through rising insurance premiums.

Those arguing for keeping referral fees will contend that they are a part of the legal marketplace and a legitimate way of acquiring business.  Solicitors will only pay for work that they believe that they can properly and effectively conduct (a requirement of professional conduct) plus the system discourages solicitors taking on unworthy claims because there is a financial cost to each ‘lost’ claim.

As far as allegations of increased cost to insurers, a referral fee is part of the overheads of the law firm. Legal costs are fixed in the vast majority of the cases.  If a firm gets their marketing wrong it has to absorb the cost. Insurers’ arguments about the rising number of claims through the activities of claims companies seems somewhat ironic because insurers benefit from referral fees when, for example, they refer their own policyholder to a firm or engage in what is known as ‘third party capture’ whereby they contact the other party to an accident and arranging legal representation.

 

So, back to my original question: what, if anything does a ban mean to you, the consumer?

You may view referral fees as ‘dirty backhanders’. The referral fee ban, particularly when combined with the proposed changes to the costs recovery for claims, changes the claimant landscape significantly.  A concern of government that the scales were tipped too much in favour of the claimant will see the scales swing dramatically in favour of defendants who will remain free to operate their own advertising unconstrained, paying commissions to their agents and possibly establishing their own legal firms.

Removal of the mechanism to legitimately reward introductions within legal services impacts on the ways in which a consumer can chose to access justice. Consumers will be left to find their own way to legal advice and assistance.  Access to justice will depend on individual law firms. Government believes that injured individuals will find their own way to the right legal advice and, it has been suggested, that those who do not will simply fall into the ‘unnecessary or unmeritorious’ category.

The legal framework already exists to deal with any excesses in the marketplace.  It is not necessary for ministers to implement a wholesale ban on an ordinary commercial activity. One should remember that the government is not a disinterested party in the debate. It is a regular defendant paying out compensation as a result of its negligence.  Plus insurers make profits when claims are not made. To return to Jack Straw’s contention, if you genuinely believe that insurers will meet their promises that premiums will go down, you might want to think what price ‘access to justice’ is to you.

 

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  • http://twitter.com/john_storer John Storer

    As a criminal defence lawyer, I haven’t paid the whole “referral fee” debate the attention it deserves, and found this a very interesting article.

    However, one factor not considered here is the public perception of claim companies. My evidence is anecdotal, coming from friends and even close family, but most people I know outside the legal profession believe that claims companies:-

    a) are directly responsible for the increase in motor insurance premiums; and

    b) work for lawyers to increase their profits rather than genuine claimants seeking redress.

    Only yesterday, my wife commented on how appalling it was to see that our local weekly market now had a stall run by a claims company seeking to generate new accident claims. She could not be shaken from her view that such companies are solely responsible for bogus insurance and accident claims being made.

    Just an observation

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