Evidence submitted by Andrew Parker, Head
of Strategic Liaison, Beachcroft Wansbroughs
1. This response is sent on behalf of Beachcroft
Wansbroughs, a full service UK commercial law firm employing more
than 1,300 people with a turnover of around £89 million,
approximately half of which is generated from litigation services,
principally for insurance and health sector clients. Operating
from offices across the UK in London, Leeds, Birmingham, Bristol,
Manchester and Winchester as well as Brussels, our clients include
business sectors as diverse as financial services, retail, construction,
telecommunications, education, health and local government.
2. As Head of Strategic Litigation, the
writer Andrew Parker has been involved in the main test cases
on the "no win, no fee" regime since 2001, including
the test cases on the Claims Direct and The Accident Group (TAG)
schemes. Both these claims management companies styled themselves
as market leaders, championing the cause of injured claimants;
both have since ceased trading, leaving many claimants out of
pocket.
EXECUTIVE SUMMARY
— There is a "compensation culture",
not least in the people's perceptions about bringing claims;
— Claims Farmers and others advertising
"no win, no fee" are largely responsible for a "have
a go" culture;
— The true workings and effect of "no
win, no fee" are poorly understood;
— "No win, no fee" has driven
up legal costs and removed genuine claimants from the centre of
the process;
— Rehabilitation needs greater focus,
without creating an opportunity for extra layering of costs;
— The recovery of success fees and
ATE premiums from paying Defendants has no logic;
— The ability of defendants to fight
spurious claims must not enable solicitors and claims farmers
to increase their profits;
— Claims farmers and other intermediaries
must be tightly regulated, especially in their advertising activities
and their financial security;
— Some clarification of the law of
negligence would send a welcome message to the public and to the
courts.
In response to the Committee's specific questions
we would answer as follows:-
Does the compensation culture exist?
3. 10 Years ago the "horror stories"
of frivolous law suits came exclusively from the USA. The striking
change over the last five years is that those stories have been
joined by similar stories from the UK.
4. Those who derive an income from bringing
injury claims will argue that the falling number of claims is
proof that there is no Compensation Culture. However our position
is that the cost of claims remains on the increase, despite the
civil procedure reforms introduced in 1999. Objectively that may
be sufficient evidence that there is a Compensation Culture even
if claims numbers are falling.
5. It is quite possible that the underlying
trend remains upwards. The annual figures over the past five years
or more have been distorted first by the vast numbers of claims
by miners under the scheme set up by the Government and secondly
by the activities of Claims Direct and TAG, who arguably generated
more claims than could legitimately be brought. Analysis of the
annual figures without further development of these points should
be treated with caution.
6. More importantly, the perception from
stories in the media is that we do have an unacceptable culture
of claims being brought on the basis that there is "something
for nothing". That culture is creating a climate in which
intermediary companies thrive, by feeding on the "have a
go" mentality and encouraging people to sign up to agreements
that are not in their best interests. The survey undertaken by
Norwich Union in 2004 (see their December 2004 report "A
Modern Compensation System: Moving from Concept to Reality")
showed that the vast majority of people believe that compensation
claims are more prevalent now than 10 years ago.
7. The current activities of so called Claims
Farmers in the endowment mis-selling field is a classic example.
The purpose of compensation in this field, which is available
via a free service set up by the Financial Ombudsman's Service,
is to provide compensation for endowment policyholders who believe
that they may suffer a shortfall in their mortgage repayment.
Without exception, the Claims Farmers advertising a competing
service (usually for 25/30% of the recovery) encourage people
to make a claim on the basis that this is a windfall—none
of the companies advertise the link to mortgage shortfall, as
otherwise this would discourage Claimants from parting with a
substantial proportion of the winnings.
What has been the effect of the move to "no
win, no fee" contingency fee agreements?
8. We would be happy to explain the workings
of this regime in more detail, as our experience from talking
to clients, journalists and even judges over the last 5 years
is that the full implications of the regime remain poorly understood.
9. Briefly since 1995, a solicitor has been
able to enter into a conditional fee agreement (CFA), which provides
that he is not paid unless he wins, but that if he wins he is
entitled to an uplift (called a success fee) of up to 100% of
his basic charges. Between 1995 and 2000 the success fee was deducted
from the client's damages and was subject to a voluntary Law Society
cap of 25% of damages.
10. Clients were still exposed to the risk
of paying opponents' costs, so a market developed for "After
the Event" (ATE) legal expenses insurance, so called because
it was taken out after the accident had happened. Initially the
cost of this insurance was just £85, priced on the basis
that if all claimants paid the premium and most claimants were
successful, this would be adequate. In practice solicitors only
advised claimants to take out insurance when they were at real
risk of paying costs and so the pricing proved to be too low.
11. In 2000 the Government implemented the
Access to Justice Act 1999 and made the success fee and ATE premium
recoverable from the losing party as part of the legal costs.
This effectively removed any direct interest for the claimant
in the level of success fee and the ATE premium, as in their minds
they were no longer paying. Schemes developed whereby the cost
of the premium itself was incorporated in the insurance and payment
was deferred until the end of the case. The claimant therefore
never paid the premium unless and until the case was won, when
it was reclaimed from the defendant.
12. As a firm we have been involved in a
number of high profile cases on the impact of the "no win,
no fee" regime, particularly the test cases on legal costs
in the Claims Direct and the TAG Schemes. The following points
have been obvious throughout our conduct of these cases:—
(a) Intermediaries drive up the overall
cost of claims and have a business model which takes money from
everyone in the process, including the Claimant;
(b) Once success fees and insurance premiums
were recoverable from paying Defendants under the Access to Justice
Act 1999, any link between those success fees and premiums and
the real risk taken by the Solicitors or after the event Insurers
disappeared.
(c) Where a real risk was involved, both
Solicitors and after the event Insurers were averse to taking
it.
(d) As the OFT report in 2005 makes clear,
such products compete on service rather than price, but often
to the detriment of the Claimant.
(e) In many cases the only real winner was
the claims farmer—we have a number of examples including
the claimant who received just £33 of his £1,500 damages
from a Claims Direct case and the TAG client who succeeded in
a £1,000 damages claim but was left owing money due to a
£2,000 loan agreement.
(f) The recovery of success fees and ATE
premiums from paying Defendants has no logic (see below).
13. The TAG Scheme showed that all involved,
including the Solicitors nominally responsible for vetting claims,
were more driven by making their margins from increased volumes
of business than by providing a proper objective service to the
client. As the BBC documentary "The man who made accidents
happen" showed, the ultimate behaviour driven was for a number
of people involved in the process to manufacture claims.
14. All this activity around CFAs, ATE insurance
and legal costs generally has detracted from the primary aim of
the compensation system: to return genuine injured claimants to
full capacity or to provide damages in lieu of this. The claimant
should be at the centre of the process, yet now trails a distant
3rd or even 4th behind other vested financial interests in the
system.
15. One way of putting that right is to
focus on rehabilitation: in this context we mean treatment or
other assistance designed to return a claimant to work or independent
living as soon as possible. The insurance industry should be working
more actively with other stakeholders including the NHS to achieve
this. However there is the danger that the same vested financial
interests will see rehabilitation as just another opportunity
to layer on cost for themselves and this needs to be avoided.
16. The Government has urged Defendants,
particularly public authorities, to take a firm stance and refuse
to pay the more spurious of claims. The difficulty is that this
approach leads to increased exposure to legal costs from the "no
win, no fee" regime. The Solicitor can effectively double
his costs and may also be able to recover an insurance premium
of the same amount again, if he wins the claim.
17. No Defendant can guarantee winning a
claim which goes to trial. Even if the Defendant wins some of
these cases, the effect of winning is to produce a more valid
argument for solicitors and after the even insurers in other cases
to charge higher success fees and insurance premiums.
18. We should explain that whilst our interest
in these cases has been on behalf of liability insurers and has
been concerned with the insurance premiums charged to Claimants
by after the event Insurers, the majority of such premiums has
gone to intermediaries involved in the claims process (Claims
Management Companies etc.) rather than to the after the event
underwriters themselves. In the Claims Direct cases for example,
initially just £140 out of a total of £1,250 charged
went to the underwriters.
19. One particular problem has been the
frequency and ease by which claims management companies have become
insolvent, leaving claimants and suppliers to shoulder the financial
burden. There is no direct protection for claimants in such circumstances,
compared with the protection available if a solicitor or insurer
goes out of business. Where an industry is providing services
on such a widespread basis, there should be some sort of "bond"
or equivalent financial protection, as for example in the travel
services industry with ABTA.
20. For further information on the effect
of "no win no fee" agreements on members of the public,
we would refer you to the report by Citizens' Advice in December
2004, aptly titled "No win, No fee, No chance".
Is the notion of a "compensation culture"
leading to unnecessary risk averseness in public bodies?
21. Whilst we believe that there is evidence
of risk averse behaviour caused by the Compensation Culture, the
stories in the media have to be treated with a certain amount
of caution. There are undoubtedly valid examples of decisions
lead by a genuine fear of claims: for instance the local authority
who chops down chestnut trees for fear of children injuring themselves
searching for conquers, or the Borough Council who removed hanging
baskets from shop fronts in the town centre in case they fell
on passers by.
22. There are however other examples which
are no more than "urban myths", for instance the suggestion
that trapeze artists might have to wear hard hats.
23. Yet other examples represent local authorities
using "compensation culture" as an excuse to mask other
reasons for decisions to close facilities. The recent coverage
of the decision by Havant Council to "ban Christmas"
is a classic example, as numerous articles have cited "health
and safety" reasons for Christmas lights not being installed.
24. What is clear is that fear of a "Compensation
Culture" has distorted the balance in risk management decisions,
particularly in the public sector. Media coverage of such stories
has certainly not helped, but the mass advertising by claims companies
and by solicitor groups has fuelled the perception that compensation
is an easy way of paying for your holiday or new furniture. It
is no accident that these adverts are targeted (eg through daytime
television) at the most vulnerable sectors of society.
Should firms which refer people, manage or advertise
Conditional Fee Agreements be subject to regulation?
25. Although this potentially raises three
separate questions, as those referring, managing or advertising
work in different ways, our unequivocal answer is that everyone
who works in this market should be properly regulated.
26. We are quite clear that the problems
caused by the Claims Direct and TAG Schemes stem largely from
the mass advertising of services portrayed as "free"
in a context in which the companies sought to charge money and
to recover that mainly from paying Defendants.
27. The response from the legal profession
has been to ramp up its own advertising. In part that is probably
a good thing, as it has made the public more aware of services
on offer. However advertising which purports to be "free"
(but in fact represents an opportunity to recover a cost) and
advertising which suggests a windfall rather than proper compensation
should be subject to much tighter controls.
28. Solicitors and liability insurers involved
in the claims process are already regulated by the Law Society
and the Financial Services Authority. The problems have come largely
from unregulated service providers. There needs to be a level
regulatory playing field and the proposals in the Bill, which
as we understand it are designed to plug the gaps, are welcome.
29. There is no doubt that the Law Society's
decision to permit the payment of referral fees in March 2004
has driven up costs. Whilst these arrangements may have existed
prior to March 2004, they were unlawful and if found out, the
solicitor and other players involved would probably lose money.
Since March 2004 such arrangements have become widespread.
30. Solicitors who are obliged to part with
a fee of several hundred pounds for each valid referral will look
to make that money elsewhere in the process, hence their aversion
to fixed fees in low value cases. There is no valid basis on which
the legal costs for running a claim worth say £2,000 should
be more than twice that amount or even higher.
Should any changes be made to the current laws
relating to negligence?
31. This is a difficult area. The Government
is trying to implement a change which does not in fact alter the
common law. A change which simply generates uncertainty is not
likely to achieve the necessary objective. However something does
need to be done to combat the "have a go" culture.
32. On this basis we cautiously welcome
the concept behind Clause 1 of the Compensation Bill and its attempt
to restrict the application of the law of negligence where the
defendant is conducting a "desirable activity". This
must however be on the basis that the provisions do in fact operate
as a restriction and are clearer in impact than the current draft.
33. For the Compensation Bill to be effective,
there must be a change in culture and that must come from people
taking more responsibility for their own actions and being less
willing to blame others. For this reason, we recommend an amendment
to the Compensation Bill which makes it clear that Courts can
find Claimants wholly to blame for actions which might technically
also be the fault of another person.
34. A provision which made it clear that
it was permissible to apologise or offer help to someone injured,
without this being seen as an admission of liability, would also
in our view go some way to changing the underlying culture. There
is a school of thought that if everyone apologised, this would
devalue the apology (ask any rail commuter): however if Part 1
of the Bill is essentially about sending messages to the public,
we believe this should be included. This links with our theme
of putting genuine claimants back at the centre of the process
and concentrating on rehabilitation to return them to work or
independent living as soon as practicable.
Andrew Parker
Beachcroft Wansbroughs
November 2005
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