Seeing both sides
Date: 18 November 2011
Authors: Patrick Allen
Issue: Vol 161, Issue 7490
Categories: Opinion, Legal services
The proposed ban on referral fees is a profoundly anti-consumer measure, based on prejudice and the interests of insurers, which cannot be justified by the facts or practicalities.
Contrary to the spin from the Association of British Insurers, referral fees are not paid by insurers or clients and are not a recoverable item in the bill of costs of a successful claimant. They are a marketing overhead paid by some solicitors to acquire work. If solicitors could acquire that work more cheaply in their own marketing campaigns, they would do so. However, they mostly lack the expertise and reach, which comes with big spending, to operate in a highly competitive market.
Evidence about the workings of referral fees was painstakingly gathered by the Legal Services Board (LSB) between 2009 and 2010. The LSB could find no detriment to consumers in the payment of referral fees, only benefits. Referral fees have played an important part in freeing up the personal injury market, by providing information about claims, and assisting injured people to make contact with a lawyer. The LSB consumer panel said “the marketing and handholding role performed by claims management companies…has widened access to justice”.
Have referral fees driven up the number of claims? There is evidence that road traffic accident claims have increased since 2000, but employers’ liability claims have fallen in the same period. There are many factors at work. Undoubtedly, the Access to Justice Act 1999 regime has helped people to bring claims, and the LSB found evidence that marketing has become more effective. Research showed that clients approaching large claims management companies (CMCs) are more likely to be matched to a law firm willing to take on their case than if they approach a firm direct.
However, the LSB found that fewer consumers resolve personal injury problems than other legal problems: 42.3% did nothing or gave up pursuing their claim. In 37% of trip cases and 27% of work accidents, consumers did not even get legal advice because they did not know who to contact or how the process worked. (English and Welsh Civil Justice Survey, reported by the LSB consumer panel).
So, the arrangements of the last decade and the improved marketing techniques have assisted a key objective of the LSB—to increase access to justice.
Jackson fallacy
The biggest fallacy in the “anti”-case is that the money paid for referral fees goes to no useful purpose (Lord Justice Jackson to the Legal Action Group Conference in 2010: “If we ban referral fees, we...liberate the money which is going to no useful purpose…the referrers add no value to personal injury litigation”).
This argument fails under scrutiny. If referral fees are banned, how much will it cost to acquire the same number of cases?
First, cases currently secured by referral fees will not suddenly become available or free. There will be no queues of consumers besieging the public libraries for a copy of the Butterworths Law Directory.
Cases referred by legal expenses insurers (LEIs) will disappear. They will form in-house legal departments within an alternative business structure (ABS), all perfectly legal next year. CMCs will either be bought by large firms of lawyers or will form their own legal departments like LEIs. Again, the work will disappear inside new ABSs.
Solicitors left out in the cold will have to compete in the market for a smaller pool of cases. This will mean big spending on advertising. The cost will be at least as high as a referral fee, if not more. Google will not be giving away pay-per-clicks.
The future of solicitors’ fees
The idea that solicitors’ fees can be cut as soon as the ban takes effect is patently wrong. Current fees are fixed or assessed according to the work done. Referral fees play no part in the process. A cut in fees, while marketing costs remain the same, is tantamount to banning solicitors from marketing. If that’s the game, why don’t we ban insurers from advertising? We are all fed up with nodding dogs and brass fanfares. Insurance is compulsory, so a simple website should suffice to give consumers the information they need, and premiums can be slashed because of the savings.
This ill-thought-out measure must now be scrutinised by Parliament, who will hopefully apply some common sense and look at the evidence. The government has some explaining to do. The Ministry of Justice impact assessment candidly admits that a ban will lead to fewer claims because consumers will have less information. How can the government require the LSB to enforce a ban which will require it to breach at least three of its regulatory objectives—increase access to justice, protect and promote the interest of consumers and increase public understanding of the citizen’s legal rights and duties?
Patrick Allen is senior partner of Hodge Jones & Allen LLP, a former president of APIL & a member of the Law Society Civil Justice Committee
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