Staying on the right side

The SDT decision in Tilbury highlighted the difficulties faced by solicitors when confronted by a government which has liberalised the market for civil claims, and a regulator enforcing compliance with a code of conduct at odds with that liberalised market place (see 'Such a lonely word', Solicitors Journal, 2 June 2009). Mr Tilbury did not find himself in trouble because of greed or poor service. His problems arose because he tried to remain competitive by accepting referrals of work from a claims management company as permitted by the rules. It was the manner in which the referrals took place that caused the problems.

Claims management companies are not going away, so how can solicitors ensure they manage referrals properly and stay on the right side of the SRA and SDT?

The dovetailing of the various rules on the referral of clients to solicitors by claims management companies ought to avoid the problems encountered by Mr Tilbury, whose difficulties arose from an agreement made in 2005 before the coming into force of the claims management conduct rules on 14 December 2006. However, Mr Tilbury was subject to The Solicitors Practice Rules 1990 rules 1(a) and (c) and The Solicitors Introduction and Referral Code 1990, which are to the same effect as those parts of the 2007 Code cited above.

The fundamental problem arises from the SRA's (and the SDT's) interpretation of the Solicitors Conduct Rules in this regard.

At present there are about 2,700 claims management companies registered with the Claims Management Regulator (CMR).

The number changes quite markedly from one year to the next as, for one reason or another, the authorised bodies leave the market with new entrants registering in varying numbers. Typical reasons for deregistration are: regulatory breach, failure to renew registration, and ceasing to trade. The market is flaky as Mark Boleat, head of claims management regulation until August 2007, observed in his April 2008 report 'Claims Management Regulation: Impact of Regulation one year assessment'. Problems included incorrectly completed application forms and 104 bounced cheques for registration fees.

An appreciation of the CMR's perspective is helpful in understanding how solicitors should adapt their businesses and some of the key points solicitors should note from the Boleat report are:

• Malpractice in respect of personal injury cases is predominantly the responsibility of solicitors. The SRA needs better regulatory tools to deal with malpractice.
• Contrived accidents ('cash for crash') are a problem worth £200m each year. It was recently reported that solicitors are being investigated in this connection (see Solicitors Journal 153/21, 2 June 2009).
• The SRA needs to take more effective action to tackle solicitors who do not comply with the rules governing solicitors' conduct.
• In personal injury referrals malpractice often involves misleading contracts and fraud with cases being run for the benefit of the intermediary not the client. This has been characterised by Mark Boleat as the 'win but little compensation' scenario where the majority of compensation was taken in fees leaving very little for the client.
• In employment cases claimants are often deceived into dealing with an intermediary.

In conversation with the present head of claims management regulation at the Ministry of Justice, Kevin Rousell, Bolat explained that the work of his team is growing rapidly. He now has a Compliance Unit of 35 staff based in Burton upon Trent and a London HQ team of eight governing approximately 2,700 claims companies. This is a considerable increase from the few hundred companies they started with in April 2007. They receive 30-40 applications per week, often from groups splitting from established companies; there is much fluidity in the sector. In fact the work has increased so much in just two years that he is now engaged full time in the post and has given up the policy development work on conditional fee and ATE insurance which he also undertook.

They have a Memorandum of Understanding with the SRA for the purpose of exchanging information which enables them to develop their regulatory activities. This has led, for example, to changes in the application and renewals form and procedures to gain more information about practices, including about the relationships between the companies and solicitors to whom they introduce claims. He expects regulation to become even more closely aligned from both his perspective and the SRA's following the introduction of entity-based regulation for solicitors from 1 July 2009.

The Coroners and Justice Bill 2009 is nearing the end of the legislative process and will probably receive Royal Assent in the Autumn. That bill will be amended to allow for statutory regulation of contingency fees. The regulations could cover a cap on the total deduction of the totality of costs from any recovery. The MoJ published a consultation paper on these proposals on 1 July.

The government hopes regulating the deduction under contingencies will put a stop to total fees crossing the red line, which Tilbury identified, of say 50 per cent. They have particularly in mind deductions from compensation awarded in employment cases.

The CMR is working closely with the Insurance Fraud Bureau to deal with, inter alia, the cash for crash issue.

Such a cap would help but may not be enough to prevent solicitors getting into trouble with the SRA. This is because many of the referral agreements provide for referral to a panel of solicitors who are, in effect, tied to the referral company thereby restricting freedom of choice of representative for the client. This remains a challenging area and one in which solicitors must proceed with the greatest of care to avoid regulatory sanction.

Next month Tony Guise will review the latest thinking on managing conflicts of interest.