Referral fees are to be banned in personal injury cases, the Ministry of Justice (MoJ) has announced
An amendment introducing the ban will be added to the Legal Aid, Sentencing and Punihsment of Offenders Bill, and the ban should be in force by next Easter.
The MoJ move follows a high-profile campaign waged by legal professional groups. However, opinion on the issue within the profession remains divided.
In June, the Legal Services Board decided against an outright ban—a move that provoked strong criticism from the Bar Council and other sections of the legal profession. Former justice secretary Jack Straw published a report exposing the profits insurers make from the fees, which were described by a senior insurance executive as the industry's "dirty secret".
Personal injury lawyers gave a mixed reaction this week—some called for the ban to be extended while others warn of "dangerous" implications for clients as the profession hovers on the verge of the ABS (alternative business structures) revolution.
Welcoming the ban, Tim Oliver, president of the Forum of Insurance Lawyers (Foil), said: "Referral fees were symptomatic of an unbalanced civil justice process layered with unnecessary costs, to the detriment of wider society as a whole."
Andrew Parker, head of strategic litigation at Beachcroft, said: "Referral fees no longer have a place in personal injury claims.
"It is vital, though, that the government follows this up by fixing and reducing costs for all lower value injury claims; the referral fee has to come off both sides of the claims balance sheet."
Peter Lodder QC, chair of the Bar, said: “They are bribes and add an unnecessary cost to litigation."
However, Tim Roberts, senior partner, Parabis Limited, said: “I am afraid the MoJ is looking down the wrong end of the telescope.
"It is the fees charged by the law firms which they use to pay inflated referral fees that is the problem, not the referral fees themselves. The Solicitors Regulation Authority (SRA) are going to be busy next year licensing all these referral source ABSs so they can swap the profit earned on the legal fees for the loss of their referral fee income. Moving the goalposts is not addressing the issue."
Seamus Smyth, president of the London Solicitors Litigation Association (LSLA), said: “Like them or hate them, referral fees are a serious factor in the funding of litigation and litigation practices, and legislating them out of existence will present serious challenges to the draftsman.
"We wish him or her luck, and will be standing by to lend whatever assistance the LSLA can give in producing legislation which achieves the desired object without permitting or creating loopholes and satellite litigation, and more work—not for the first time—for litigators.”
Susan Brown, director at Prolegal, said: "Banning referral fees in the personal injury field will be extremely dangerous for consumers, not because of any inherent merit in referral fees, but because of the impact the ban would have on the marketplace at this particular time, on the threshold of the introduction of ABS.
"It is going to be very difficult for the MoJ to come up with a formula that will effectively ban referral fees. They take many different forms now, ranging from lawyer collectives where advertising costs are pooled within an MoJ registered CMC, to fees paid by lawyers to staff for referring friends and family, to referral or fee sharing arrangements between firms of solicitors specializing in different fields.
"Before solicitors were permitted to pay referral fees there were numerous ingenious arrangements in place to channel business that attempted to by-pass the rules, and no doubt similar ingenious schemes would surface if they became unlawful again."
She warned that "the vast majority of personal injury claims will fall into the hands of unqualified, inexperienced staff, many of them working within businesses controlled by insurers.
"Insurers’ enthusiasm for a ban on referral fees is not based on distaste at the notion of that clients are a commodity to be bought and sold, but on the fact that they regard this as the ideal opportunity for them to remove independent solicitors from the process altogether. The overall cost to insurers of those claims will then be reduced because they will no longer have to pay those solicitors’ fees, and because of the downward impact on levels of damages resulting from the absence of competent independent advice from those solicitors within the process. This position is compounded by the emergence of ABSs."
