Outlawed

Justice minister Jonathan Djanogly confirmed last week that the government will seek to introduce a ban on referral fees through an amendment to the Legal Aid Sentencing and Punishment of Offenders bill. Exact details are not yet known and there are major question marks over how referral fees will be defined and how the ban would be policed.

APIL, the association representing claimant PI lawyers, voiced the concerns of many in this part of the sector that the ban would risk driving referral fees underground. Others '“ in particular the Law Society, whose council voted in favour of referral fees in 2004 '“ have already challenged the decision to limit the ban to personal injury and not extend it to conveyancing. But, however the rules are ultimately framed, most firms with business models built around referrals will have to revisit their assumptions. It is a bitter pill for smaller practices which embraced legalisation '“ reluctantly, perhaps, to start with until it addled them into a false state of safety '“ and will now have to completely overhaul their referral arrangements. For bigger firms, however, this could be the perfect, though unintended, incentive to set up ABSs allowing the keep the work and revenues in house.

Unsurprisingly, claimants and defendant lawyers are divided over the need for the ban, but what all seem to agree on is that the ban in itself will not be enough and could even have perverse effects.

A good start, but more is needed

Don Clarke is the vice president of the Forum of Insurance Lawyers (FOIL)

We welcome the government's announcements in relation to referral fees. We consider this to be a key development in relation to access to justice. FOIL is a keen advocate of access to justice but not in the narrow terms which often characterises the debate. We believe access to justice is for all. The Department of Work and Pensions has confirmed that 571,111 whiplash claims were registered with the Compensation Recovery Unit in 2010-11 representing an increase of approximately ten per cent on the previous year. We all pay for the current system '“ whether it be via premiums, tax, community charge or in our weekly shopping basket. In our experience compensators have no issue paying compensation, it is the cost of delivering that compensation (which substantially exceeds that paid by other European jurisdictions) which is the problem.

However, while the ban is important in terms of behaviours, the real issue is the amount of money swilling around the system, and therefore we see this as only one of several steps which need to be taken. Claimant lawyers only pay the level of referral fees, which have attracted so much recent media attention, because they can afford to do so. Accordingly we believe that the ban should be accompanied by a reduction in the level of fixed fees and the guideline hourly rates.

Second, while the Legal Aid, Sentencing and Punishment of Offenders Bill is an important step, it is vital that the Jackson reforms are implemented as a whole package rather than on a piecemeal basis. The bill does not deal with, for example, the introduction of one-way costs shifting; a new test of proportionality; reversal of the decision in Carver v BAA; increasing the rates for successful litigants in person; and increasing general damages by ten per cent.

While we appreciate that these issues, or some of them at least, are being addressed by other means, it is important all such activities are coordinated properly and introduced with the above mentioned reforms.

We support the impetus and importance that the government has now placed on this issue and will continue to press for further reform which we consider to be in the wider public interest.

How and when will the ban be imposed?

Andrew Parker is head of strategic litigation at Beachcroft LLP

In a delightfully vague statement, the MoJ announced on 9 September that it will ban the payment of referral fees in personal injury cases, as a means of tackling rising insurance costs. However, little further detail is provided as to how or when the ban will be imposed.

It is likely that the government will introduce statutory powers to implement such a ban, with the detail of how it will work set out in regulations to be introduced under those powers. Even if we do see the outline of these powers in the next few weeks, the scope of the provisions in practice may not be clear immediately.

The obvious vehicle for any statutory powers would be part 2 of the Legal Aid, Sentencing and Punishment of Offenders Bill, which already introduces Jackson LJ's main reforms. It is anticipated that those reforms would come into force from 1 October 2012 and this timetable appears to work for a ban on referral fees as well, as it would give time for the detailed regulations to be published and for those affected to make the necessary adjustments to their business models.

The scope of any ban is likely to be restricted to regulated persons and their associates: in this context, lawyers, claims management companies, insurers and brokers. That does not necessarily capture all those involved in the referral 'food chain', so one obvious solution may be to ensure that the ban extends both to payment and receipt by regulated persons. For a ban to work in practice, it must be effective to catch as wide a range of transactions as is needed. The ban imposed on the solicitors' profession before March 2004 was difficult to enforce and lessons must be learned.

To deliver any promised reduction of insurance premiums, it is essential that the ban on payment by solicitors is reflected by an equivalent reduction in the costs paid to solicitors and not just in motor claims. If the ban simply prevented insurers from receiving such revenue, the cost of insurance would in fact rise.

It is in the interests of consumers and solicitors, insurers and claims management companies alike for the government to clarify the scope of the intended ban as soon as possible.

A massive own goal

Patrick Allen is senior partner at Hodge Jones & Allen LLP

We ought not to be surprised at the government's announcement to ban referral fees in personal injury cases given the powerful and unholy alliance of Jackson LJ, the Law Society and the Association of British Insurers (ABI).

We can judge the LSB's reaction from their terse statement in response to the proposal. Their own carefully gathered evidence showed no consumer detriment and no regulatory case for a ban.

For insurers, it is the latest victory in their strategy to reduce the number and cost of PI claims. In insurance paradise, insurers collect premiums but few people make compensation claims. Insurers detest the changes to claimant PI process which has opened up the PI market to the satisfaction of the Office of Fair Trading (OFT). Referral fees and increased advertising have facilitated an increase in people exercising their rights to claim.

The ABI says that referral fees encourage people to bring poor or fraudulent claims and encourage a compensation culture. What is the evidence?

Success rates of cases entering the system remain high. No competent insurer will pay a bad claim. Claims which settle or succeed at trial '“ the vast majority '“ are by definition claims of merit and that is what the insurance is for '“ to pay good claims.

Despite everyone looking high and low for the compensation culture over the last ten years, no one can find it '“ not the Cabinet Office, not Lord Young. There is only the shameful myth constantly trotted out by the media and the ABI.

Referral fees are hard to define and ABSs will make a ban futile. All those who currently control PI cases, such as legal expenses insurers, will form their own legal departments to handle the work and keep the profits in house.

I suspect that the LSB is fuming at the impossible job coming its way. The OFT will not be pleased and we may hear more from them. For the Law Society this is a massive own goal as the ultimate losers will be victims of accidents and small firms, and the winners, once again, the insurers, who can hardly believe how good it is getting.

Balance will be restored in PI claims

Des Collins is senior partner at Collins Solicitors

The announcement that referral fees in personal injury claims are to be banned should ultimately add a level of transparency across the whole personal injury sector and, as such, it is to be welcomed.

Before referral fees came into existence, those with genuine claims were able to find appropriate legal representation where necessary, and it is easier now to find good legal support than ever before.

It is a misnomer that referral fees, or specifically the middle men who get paid these fees, genuinely help oil the wheels of justice by helping to direct those victims of accidents to find professional assistance. These middle men encourage people to sue, at no risk to themselves, however minor their accident. This clogs up an already over-burdened legal system and this announcement will, in time, help alleviate the pressure.

If the government can satisfactorily define exactly what a referral fee is, and set out clearly how this proposal will be regulated, then this could potentially have a profound impact. The danger is that if it doesn't this will be a pointless exercise and referral fees will be driven underground '“ which would make matters worse.

Such a ban should help to rebalance personal injury claims, specifically relating to motor accidents. This whole sector requires an urgent overhaul.

The other major plus for this proposal is that it should help restore some of the legal profession's reputation which has suffered considerably owing to this ongoing perception of a 'compensation culture'.