In My Opinion...... Referral Fees

The payment of referral fees is to be banned. Lord Justice Jackson has got what he wanted. Professor Dominic Regan considers the ban and whether it may presage other seismic shifts.

A referral fee is a sum paid by a solicitor so as to acquire instructions. Trust solicitors to end up paying to do work. Chapter 20 of the final Jackson report sets out the history and ramifications. His view was that the only winners were the recipient of fees. An outright ban was proposed.


The position in Whitehall in the summer of 2010 was that solicitors who wanted to spend their money to secure work should be free to do so. In his report last autumn Lord Young identified concerns. Those who paid out the most got the most. A firm handing out these fees got one hundred times more cases than those who didn’t pay fees. There was no correlation between payment and quality of work. Indeed, the higher fee remitted meant that the balance left to cover the cost of doing a proper job for the client was severely diminished. It was also noted by Young that the solicitor might be in a completely different part of the country.
Earlier this year we saw published a Legal Services Board report (Referral fees, referral arrangements and fee sharing) suggesting that since claimants were not bothered about these fees, which were borne by their own solicitor, we should leave be and have another look in 2013. The report failed to meet the trenchant criticisms made by Jackson and shared by many solicitors as I witnessed on a “Rupert roadshow” in 2009.

 

A change of heart


Why the change of heart? The Government was rattled, that is why. Jack Straw, the man who established the claims management regime, disingenuously protested about referral fees, rich since they thrived on his watch. The Times gave him a prominent platform and Axa, an insurer not addicted to referral fees unlike some other big name insurers, renounced the selling of claims altogether. Then the Daily Mail came onto the scene. That newspaper is the most influential in the country. Forget Murdoch. Upset the Mail and politicians see their career ending. The brilliant road traffic lawyer Jon Spencer gave them a 2 page interview in which he described the schemes and scams which now inhabit the crooked world of cash for crash. Put this in the context that there are 31 million car owners in the UK. Road traffic premiums have jumped 40% in the last year. Rightly or wrongly, the Government has intimated that banning fees would cut the cost of insurance by £150 a year, the equivalent of a 1p cut in the basic rate of tax.

 

 

 

The ban – when and how:


Whitehall talk is that a ban could be in place as early as next April. That said, there are going to be some intriguing issues which will arise. How does one even define a referral fee? The Government press notice announcing the ban said, accurately, that there is no universally accepted description. What of payments in kind rather than hard cash? Tom Jones at Thompsons told me that his firm gives support, often in the form of free legal advice, to charities which cater for those suffering from industrial diseases. Unsurprisingly, clients are directed towards a firm that knows what it is doing. The giving of support generates a referral in as noble as a manner as I can think of.  How will the law be enforced? Lord Justice Jackson considers it can be done either by primary legislation or by amending the code of conduct for solicitors. There might also be FSA involvement.

 

 

 

 

 

 

The other side


There are 2 sides to every story. One solicitor on the south coast and for whom I have the very highest regard told me that without the ability to purchase cases their injury department would collapse. According to Times on Saturday 10 September 2011 the Insurer Admiral, a company with a decent record for pragmatism in handling claims, derives 6% of car insurance profits. A few law firms issued an angry attack on the proposal and said that it would not bring down the cost of insurance, an assertion I suspect would have Jackson bemused. The introduction of a level playing field is something he thinks beneficial and he makes the wry observation that claimants somehow found legal representation prior to the legitimisation of referral fees in March 2004. If referral fees are not payable then there will be the capacity to do both a better job and cut the cost of doing so.

Amidst all the froth and tosh about alternative business structures there does now arise one serious possibility. Might not a claims management company overcome the ban by buying the firm it sold the cases to? It would then direct cases it acquired to itself. I believe deals are already in the offing.
Another ploy will be to call referral fees something else, perhaps marketing or advertising charges. At a meeting on Wednesday 28 September Mr Straw indicated that he was not having any nonsense and strict enforcement of the ban would happen. A final word of warning for those rash enough to say that banning referral fees will not bring down the costs of road traffic litigation. Some solution is necessary and one certainty is fixed costs.

However, I can think of another measure which would be both guaranteed to reduce costs and overnight destroy the vast majority of injury firms in business today. Increase the small claims personal injury limit to £5,000. You could keep referral fees then for no one would ever pay out that which they could never recoup. No costs, no referral fees and, oh yes, no solicitors. Is that what they want? It is what they might get. Relent.

 

 

 

 

 

 

The first of many victories?


Note how the Government capitulated in the light of public opinion here. Exactly the same thing could happen to the proposal to remove legal aid from clinical negligence. That battle has yet to start. It will.

Professor Dominic Regan has been helping Lord Justice Jackson and His Honour Judge Simon Brown QC with costs reform. He would like to thank Jon Spencer and Rosario Bavetta for inspiration in writing this article. All thoughts are his and his alone. This article first appeared in the New Law Journal.


Professor Dominic Regan, Professor of Law, City University London

 

 

 

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Dominic Regan

Dominic Regan, @krug79, is a Professor at City Law School. He has worked since 2010 with Sir Rupert Jackson on aspects of reform and last year advised the House of Commons Select Committee about costs law as it applies to non-disclosure agreements. He buys a lot of wine.