Referral Fees –The Final Straw….

October 19, 2011
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Well, unless you have been vacationing on the Moon recently, you will have no doubt read or heard somewhere about Jack Straw’s crusade to ban referral fees in the legal sector.

The Labour MP for Blackburn said the cost of personal injury claims has doubled to £14 billion in 10 years. He was also quoted as calling the referral fee culture an “unethical and unwholesome practice”. He failed to mention a recent report in a national newspaper that the Labour Party had received over £350,000 in “donations” from personal injury lawyers.

So, who can we trust? Are the overall intentions honourable, and indeed justified, here? I hope to shed some light on the matter and dispose of some of the myths surrounding certain aspects of this industry.

Referral fees were first introduced in March 2004, and it was no coincidence that these were introduced shortly after the fixed costs regime was implemented for RTA cases. Fixed costs on RTA matters made it extremely difficult for solicitors to yield a profit for representing victims following car accidents and by allowing referral fees it meant that the solicitor could subrogate some of the necessary investigative work to the Claims Management Company (CMC), for a fee, and referral fees were subsequently allowed.

Since that time the CMC industry has grown, and the Ministry of Justice (MOJ) currently lists over 3500 companies as being regulated for the referral of personal injury claims. It is interesting to note that companies regulated by the Financial Services Authority (FSA) or those who generate personal injury leads which are incidental to their business (insurance companies, brokers or garages, for example) did not previously require MOJ regulation, so the number of companies previously receiving financial benefit from referring personal injury claims is, in fact, far greater than those listed on the MOJ website.

Those not fully converse with the legal sector find it all too easy to blame the legal sector and alleged “claims culture” for their increased insurance premiums. However, were you aware that, in 2009, the number of accidents in which someone was hurt was 31% lower than the average for 1994 to 1998? Were you also aware that RBSI – owners of Direct Line Insurance, Churchill Insurance and Privilege Insurance, to name a few – received over £15m in referral fees in the first 6 months of this year? This accounts for more than 7% of their profits for the first half of the year. Were you aware that shares in Admiral Insurance were down 13% due to the likelihood of referral fees being banned? This shows just how profitable this sector is for insurance companies.

So, how do insurers make up the expected shortfall in profits once referral fees are banned? We all expect our annual motor insurance premiums to be reduced, but the reality may be very different. Even if our motor premiums do go down, which is unlikely to happen for several years, my suspicion is that your household, travel and life premiums will increase. They need to make up this huge deficit somewhere, after all.

In other areas, Justice Minister Jonathan Djanogly has been championing the CMC industry, and believes that forging closer links between CMCs and solicitors could be “advantageous”. Subsequent to that Djanogly relinquished his role of regulating CMC’s after it was revealed that his family had financial interests in the referral industry. Djanogly’s brother-in-law owns 2 CMCs, and Djanogly’s own children hold shares in each of these CMCs.

So, who can we trust?

My overall view here is that insurance companies are trying to corner the entire personal injury market. Under the Alternative Business Structure (ABS) many insurers will now be setting up their own legal practice, arranging legal representation not only for their own policyholders following accidents, but probably for any unrepresented person looking to make a claim against them. The result? Well, whilst they may have to release payments for any claims made against the policy, they are likely to profit from legal fees generated in respect of the same, which clearly helps balance the books. Will this saving be passed on to the consumer? I suspect not. In fact, I suspect insurers will be releasing record profits within 5 years.

Whilst it is clear that the claims culture needs addressing, is making several thousand people redundant the answer? Is writing off several million in corporation tax and VAT a good move for the Government, considering the current state of the economy?

Some quarters of the legal sector applaud Jack Straw’s crusade, as this will no doubt provide a level playing field for the smaller law firms to become more involved in RTA claims. Myself, I’m really not so sure….

Make your own mind up.

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