House of Commons - Constitutional Affairs

Select Committee on Constitutional Affairs Third Report

3 Fixed and graduated fees in the transitional period

52. A main element of Lord Carter's and the DCA/LSC's proposals for legal aid procurement and remuneration reform is an almost comprehensive move away from payment for publicly funded legal services on the basis of hourly rates set by the LSC to a market-based system. As a temporary arrangement to prepare for this, the LSC will establish a system of remuneration on a per case basis by fixed or graduated fees. It is planned that this arrangement will last only until the introduction of competitive tendering in October 2008 and April 2009. This change to new fee schemes and remuneration arrangements attracted the most immediate and sustained criticism from legal aid providers; most of the memoranda we received from legal aid solicitors and representative groups complained about the too low levels of the proposed fee schemes and the lack of, or insufficient, graduation of the new fee schemes. While most of the memoranda and the oral evidence predate the current modified DCA/LSC fee scheme proposals, we are convinced that the criticisms voiced in these submissions, by and large, remain valid.

The move from hourly rates to fees per case - a continuing process

53. The current proposals for new or modified existing fixed or graduated fee schemes is only one step in what has been a continuing process for the last one and a half decades. Fixed or graduated fees are not Lord Carter's invention; standard or graduated fee schemes have been in operation for different areas of legal aid for some time. Sir Michael Bichard, Chairman of the LSC, said: "we must […] not give the impression that somehow we are starting this process with Carter. What we are actually doing is developing the journey, if you like, which is going to be learning from tailored fixed fees in these other innovations".[65]

54. Solicitors' defence work in the magistrates' courts since 1993 has been subject to a standard fee scheme: it is paid in three categories (guilty pleas, contested or cracked trials and committal proceedings to the Crown Court) with two levels of standard fees, a lower and a higher standard fee. The level of the standard fee is determined by the amount of work a solicitor carries out on the case (on the basis of an hourly rate calculation). Up to a certain case-value the lower standard fee is payable, beyond this threshold the higher standard fee will be paid. If the solicitor's costs go above the limit set for the higher standard fee, remuneration will be on an hourly rate basis, calculated after the event. This fee scheme has been considered as successful in containing magistrates' courts legal aid spending.[66]

55. Similarly, in the Crown Court, since 1988 there has been a standard fee scheme for litigators (i.e. solicitors), which, however, because of too wide escape clauses, has not been applied widely.[67] For defence work of advocates (i.e. barristers and solicitor-advocates) in the Crown Court, a graduated fee scheme has been in application since 1997 and was extended to apply to most cases, apart from Very High Cost Cases expected to last longer than 40 days, in October 2005. This fee scheme uses a formula made up of a base fee which varies with advocate type and offence type, uplifts for length of trial, a daily refresher and uplifts for the number of pages of prosecution evidence and prosecution witnesses. It includes a range of additional payments to cover smaller events (such as sentencing hearings) and preparation activities (such as the viewing of video tapes).[68]

56. In the family courts, a graduated fee scheme for advocacy by barristers in both public law and private law family law matters has been in operation since 2001 but does not extend to legal aid work by solicitors.

57. The most comprehensive fixed fee scheme in operation so far is the Tailored Fixed Fee Scheme which was piloted on a voluntary basis in 2004 and became mandatory for solicitors for most areas of family and civil legal help (i.e. advice and assistance but not litigation in the courts) in April 2005. It excluded only asylum and immigration cases and currently remains voluntary for mental health law cases. Under this scheme legal help cases are paid on a per case basis rather than an hourly rate calculation. The per case rate is different from solicitors' firm to solicitors' firm as it is calculated on the basis of average cost per case in each individual solicitors' firm in 2003-04 (with a 2.5% inflation increase per annum) - the "Tailored" element. These fees exclude disbursements and the costs for travel and waiting time by the solicitor, which are paid on an hourly rate basis. The same applies to the current standard and graduated fee schemes in the magistrates' courts, Crown Court and the family courts.

The new fee schemes

58. Lord Carter and the Government regarded those legal aid remuneration schemes that were still based on hourly rates as potentially rewarding inefficient providers and not providing sufficient economic incentives for efficient providers. A similar reasoning applies to planned replacement of the current Tailored Fixed Fee Scheme for civil legal help: because the individual firm's rates per case are set according to that firm's average case cost as calculated on the basis of hourly rates for the year 2003-04, it may be that two firms which work to a comparable standard of quality and have a very similar case mix charge different rates per case. This may result from one firm working more efficiently than another and achieving lower average case costs in 2003-04. Alternatively, the differences in average case costs may be justified by differences in case complexity and client type. Unfortunately, the LSC has no reliable way of discerning between these two situations.

59. The Carter Report says, under the plans for the transitional period:

"There should be a wholesale move towards fixed pricing for work. Fixed pricing rewards efficiency and suppliers who can deliver increased volumes of work. However, pricing should be graduated for more complex work so that cases genuinely requiring more expertise and effort are priced fairly."[69]

Lord Carter and the DCA/LSC initially published fee scheme proposals for solicitors' publicly funded defence work in the police station and the courts, for general civil legal help, mental health and asylum and immigration work as well as family work.[70] These fee schemes were based on a fixed fee per case; the mental health, asylum and immigration and family fee scheme proposals envisaged different fees for different stages in the progress of a case up to a court or tribunal hearing. The fee schemes provided for an escape clause to payment by hourly rates where the value of the work, when calculated on an hourly basis, exceeded four times the value of the fixed fee for the case or stage of the case. The escape clause for the police station scheme was set in Lord Carter's report on a basis of hours worked and varied between 24 hours in London and 13 hours in Humberside.

60. These initial plans were partially withdrawn following a consultation process in the autumn 2006 and new proposals for the different fee schemes were published by the DCA/LSC.[71] The main changes are modifications to fee levels for the family fee schemes and the general lowering of the escape clause to three times the fixed fee value and twice the value for solicitors' preparation of child care court proceedings (level 3 of the Care Proceedings Graduated Fee Scheme).[72] For this latter category of legal aid work, the current LSC proposal also provides for four regional differentiations in the fee levels.[73]

61. For solicitors' defence work in the magistrates' court, the Government decided in November 2006 only to revise the current standard fee scheme for urban areas by including in the fee a reduced element for travel and waiting, which are currently remunerated separately on an hourly basis. For solicitors' defence work in the Crown Court, Lord Carter suggested a graduated fee scheme similar to the present fee scheme for advocacy in the Crown Court, with base fees according to offence type, uplifts according to the length of trial and, in certain cases, further uplifts for the number of pages of prosecution evidences and the number of prosecution witnesses.

62. Most witnesses agreed that they had no objection in principle to legal aid remuneration on the basis of graduated fees rather than hourly rates. The only qualification of this general agreement was that the fees should be appropriately graduated so as to reflect as much as possible the complexity of a case.[74] Sir Mark Potter, President of the Family Division of the High Court, called the initial DCA/LSC proposals for the family fee schemes "a betrayal" of Lord Carter's general suggestions in the sense that these proposals did not envisage a proper graduation according to case complexity, which he thought Lord Carter had in mind when writing his report.[75]

63. Similarly, the legal profession criticised the relative rigidity and absence of a proper graduation of the fixed fee for police station work, civil legal help and family legal aid work. David Emmerson, Chairman of the Legal Aid Committee of the family solicitors' association Resolution, summed up what we were told by many providers: "as an organisation, we do not have a problem with fixed fees. Fixed fees can be advantageous but they have got to be pitched."[76]

64. The Government countered that:

"[…] in order for efficiency to be fully encouraged, the fees must generally be as simple as possible, without an array of 'bolt-ons': if additional payments were available as a matter of course in more expensive cases, there would be far less of an incentive to seek more efficient working practices. Fixed and graduated fees revolve around the concept of 'swings and roundabouts' - that is, a case that is more expensive than the standard fee to a firm will be balanced, in the long run, by one that is cheaper."[77]

65. We agree with Lord Justice Thomas that simple payment by time for legal aid work encourages inefficiency on the part of the provider,[78] even where fees are subject to strict taxation and auditing. However, it is readily apparent that a per case remuneration system based on a single fixed fee without further graduation or fine-tuning to match case complexity, except for an escape clause set at a relatively high level (three times the fixed value), will tend to reward large providers dealing with a high volume of straightforward cases, benefiting from the swings and roundabouts effect inherent in fixed fees.

66. Under this remuneration model, a significant number of smaller firms and sole practitioners would have to grow, merge and significantly change working practices and case mix in order to create the case volume and make sure that the fixed fee system could work for them. Where they would not succeed in this, they might be forced to leave the legal aid market. However, not everywhere is the legal aid market suited for the development of large providers. We have particular doubts with regard to the area of social welfare law. The introduction of flat fixed fee schemes for police station work, civil legal help, mental health, asylum and immigration and family legal aid work may thus have unintended adverse consequences for the quality and availability of publicly funded legal services across the country.

FLAT FIXED FEES AND THE QUALITY OF LEGAL AID

67. In Scotland after the introduction of rigid fixed fees for criminal legal aid work in summary cases in 1999, as Professor Frank Stephen, of Manchester University, informed us, firms which were heavily involved in this kind of legal aid work dramatically increased the number of cases they undertook. He predicted a similar development in England and Wales (certainly in criminal legal aid work in the police station), once the fixed fee schemes were introduced. However, Professor Stephen also noted that following the introduction of the fixed fee scheme in Scotland, legal aid defence lawyers dramatically reduced the number of interviews they conducted with prosecution witnesses in preparation for the eventual trial (the 'precognitions'). Generally, Professor Stephen's research suggested that the fixed fee scheme led to an overall reduction in client contact and the amount of case preparation defence lawyers undertook. While he did not make a judgment about the quality of the Scottish defence lawyers' work either before or after 1999, he predicted that the introduction of fixed pricing for legal aid work in England and Wales "would result in similar behaviour of English legal aid specialists".[79]

68. Based on this experience we are concerned that while flat fixed pricing per case may indeed lead to an increase in the number of people helped, both in criminal and civil legal aid, this increase may be achieved at the expense of quality of legal advice and representation provided.

69. Significant diminution in the quality of legal aid advice and representation may or may not be picked up by peer review. Reliance on case volume as a precondition of adequate remuneration for legal aid work should therefore be limited in order to prevent a reduction in quality as a result of mass provision of legal advice by providers seeking to increase case volume to deal with the swings and roundabouts inherent in fixed fee schemes with little graduation.

70. We have no objection in principle to a system of graduated fees provided that system adequately captures the amount of work a legal aid supplier has to undertake to provide high quality advice and representation. For most kinds of legal aid work, such a system will require appropriate graduation.

PROTECTING VULNERABLE CLIENTS

71. A constant warning we received throughout our inquiry was that the relatively inflexible new fee schemes would reward suppliers for handling primarily simple cases. This might increase the risk of legal aid providers engaging in 'cherry picking' of simpler cases to the detriment of vulnerable clients, such as those with little command of English or who are disabled, who might require more attention and time from the legal aid practitioner dealing with their case.[80]

72. The Law Society has warned us that:

"[...] the proposals will adversely affect access to justice for disabled clients. Casework for disabled clients can be extremely time consuming as more assistance may be required, e.g. in the taking of instructions and explanation of options as well as additional expenses such as sign language interpreters or home visits. Within a fixed fee structure there is a risk that suppliers will have less economic incentive to take on these cases. Even those suppliers who regard this work as part of their public service duty may find that economic constraints will reduce the number of disabled clients they can assist."[81]

Similarly, the Civil Justice Council's Access to Justice Committee described the expected effect of the civil legal aid reforms on citizens with mental health needs or disabilities as "potentially discriminatory".[82]

73. We asked the LSC about the risk of cherry picking and the consequences for vulnerable clients; they told us that they were confident that the introduction of the new fee schemes would not lead to cherry picking of simpler cases by legal aid providers in order to remain economically viable. Based on case mix monitoring after the introduction of the present Tailored Fixed Fee Scheme for civil legal help, the LSC concluded that cherry picking had not occurred when remuneration in civil cases moved away from hourly rates to fixed fees per case under the Tailored Fixed Fee Scheme in 2005.[83] We fear, however, that the introduction of the Tailored Fixed Fees in 2005 may not be comparable to the situation civil legal aid provider are faced with now: while the Tailored Fixed Fee Scheme was 'firm-sensitive' and tailored to a firm's individual case mix in 2003-04, the Replacement Scheme will be based on the average case costs of all civil legal aid providers per category. Firms which dealt with a larger number of complex cases routinely or on the basis of informal local referral practices will now be faced with losses unless they change their case mix. As opposed to the situation in 2005, there is now a very real pressure on certain firms to change their case mix in order to 'adjust' a real or perceived case load of above average complexity and costs.

74. We asked Lord Carter about the risk of cherry picking associated with fixed fees with very limited graduation. He was adamant that this issue had to be taken care of in contracting arrangements.[84] The LSC informed us that the new Unified Contract, in its specifications, contained provisions prohibiting cherry picking by suppliers. The LSC would continue to monitor actively legal aid providers' case mix and take action where it detected significant unjustifiable change to a firm's previous case mix.[85] Doubts remain, though, about how the LSC could identify cherry picking. Peer review is considered unlikely to be an effective mechanism, as Richard Jenner, Director of the ASA, anticipated: "If suppliers cut corners because of the pressures of fixed fees, it may pick that up, but if suppliers simply decide they are not going to take on the complex cases that we were talking about earlier, there is no reason to think peer reviews will pick that up."[86]

75. We doubt the ability of any case mix monitoring system to notice the less obvious practices of cherry picking. A firm's case mix and 'key performance indicators' may conform to the LSC's benchmark objective case mix profile but the firm may still turn away clients with complex cases. Unless the client complains, we see no way that the LSC could pick up on this behaviour. Yet, it is the vulnerable, already disadvantaged client who will be the least likely to complain about being turned away by a lawyer.

76. Fee schemes which only provide for relatively flat fixed fees with very little graduation provide economic disincentives to taking on more complex cases. This is likely to disadvantage already vulnerable clients. Only appropriately graduated fee schemes which allow adequate remuneration for more complex cases and those where attendance by, or communication with, a client is unusually difficult would encourage providers to devote the time needed to deal with such cases. This might go some way to help prevent cherry picking of cases to the detriment of vulnerable clients.

A RISK TO SPECIALIST PROVIDERS

77. Closely linked to the issue of cherry picking and case mix is the risk posed by the current proposals for legal aid remuneration schemes to specialist legal aid practitioners. The LSC stressed in its supplementary memorandum to us that the current reforms were "aimed at securing high quality and specialist advice and representation".[87] However, throughout our inquiry, we were warned that these reforms would make the provision of such legal advice by qualified providers very difficult, if not impossible, as cases dealt with by specialist providers generally tend to be more complex and time-consuming and thus are more likely to be unprofitable under a fixed fee scheme. In addition, specialist providers will be expected to take on a more general case mix.

78. In its response to the DCA/LSC consultation on Lord Carter's and the Government's initial reform plans and fee schemes in Autumn 2006, the Access to Justice Committee of the Civil Justice Council warned:

"We are aware that some firms specialize in dealing with particular types of case which are more complex than others within a case category, and standardization of case costs across all case types within a category would penalize practitioners from undertaking any case type which is complex and costly. The outcome is unlikely to be that all practitioners working in a category will accept instructions on all case types - they may not have the expertise, or the clients may not present with the types of problem covered by the firm's contract with the LSC."[88]

This assessment was shared by the Law Society, who, in their written evidence to us, cautioned that the proposed fee schemes "will lead to reduced access to justice with those remaining suppliers, of necessity, offering a one-size-fits-all standardised service which may well be incapable of addressing many client needs".[89]

79. Richard Jenner, Director of ASA, said that the problems providers of specialised legal advice would face under the reform proposals was an issue of particular concern for Not for Profit organisations offering publicly funded legal advice. Many of those organisations specialised in more complex types of case and would thus face a real struggle to be able to work within the fixed fee structure:

"I think what the Government wants to achieve is basically to say that everyone should be doing a bit of everything and it will balance out by swings and roundabouts. We do not think at the moment the system has the capacity, the spread of expertise, for that to happen. What is far more likely to happen is that those higher specialist agencies will be forced [….] to start taking on simpler cases in order to make the swings and roundabouts work. There will be clients being pushed from pillar to post and you will not be able to find anyone who is prepared to take them on."[90]

80. Sir Anthony Clarke, the Master of the Rolls, stressed the important role of specialist practitioners, for example in the fields of mental health law or housing, and warned that it was "very important that when these proposals are taken forward these specialists should not be lost to the publicly funded community".[91] The likely consequences of this loss were pointed out to us by Professor Masson when we asked her about the potential effect of the abolition of the fee uplift in care proceedings for solicitors on the Law Society's Children Panel. She predicted that these very experienced and specialised providers:

"[…] will leave, retire and not be replaced and, increasingly, we will have all the parties represented by non-specialist solicitors, who will move away from the negotiation and identifying what are the real issues and focusing […] much more into litigation and fighting the cases. I would expect there to be more contested final hearings, more delays when people do not ask at the right time for expert assessments of their clients so the cases will take longer".[92]

81. The fixed fee schemes might also bring an end to effective informal local referral practices between specialist legal aid practitioners and their generalist colleagues. The South London-based firm Fisher Meredith told us in their written submission that they have:

"[…] for a number of years filtered out simpler cases so that these could be dealt with by for example, Not For Profit agencies or the like and concentrated, with a cadre of experienced solicitors, on specialist complex cases particularly those challenging public authorities. We consider this to be the best use of the Legal Aid Fund and the best use of the skill sets available to us."[93]

82. It is of crucial importance that any fixed or graduated fee system allows specialist and niche suppliers to obtain a reasonable return for their work in order to guarantee the provision of high quality advice for complex cases and thus to ensure access to justice for those requiring specialist advice and representation. There is a major risk that specialist providers will be lost to the legal aid system.

REGIONAL DIFFERENTIATIONS IN FEES

83. An issue raised in numerous submissions to us was the need for geographical sensitivity of the new fee schemes. London providers especially were adamant that the costs of running legal aid firms in London were considerably higher than in most other regions. The DCA/LSC conceded this in their initial civil and family fee schemes consultation paper in July 2006.[94]

84. However, in November 2007 the DCA/LSC published its final Tailored Fixed Fee Replacement Scheme with only national rates.[95] The modified family graduated fee scheme proposals of March 2007 also envisage a single national rate for legal advice (levels 1 and 2 of the fee schemes) and only a regional differentiation for solicitors' fees for the preparation of court proceedings (level 3). In contrast, the new police station fixed fee proposals of February 2007 are geographically specific, with the fixed fee for a police station case in Hartlepool set at £177 and at £377 in the City of London.[96]

85. Given the considerable geographical spread in the costs of running a legal aid firm, where fixed or graduated fees are set administratively, we recommend that they should, wherever possible, reflect these variations. Only then will comparable work in effect be remunerated on a true like for like basis.

THE INCLUSION OF TRAVEL AND WAITING TIME COSTS IN THE FEE SCHEMES

86. One of the most controversial issues of the current remuneration and procurement reforms is the way in which travel and waiting time of legal aid providers will be paid for. On the basis of Lord Carter's proposals, the DCA/LSC intends to roll-up payment for travel and waiting time in the proposed fixed and graduated fees so as to encourage more efficient working practices by legal aid providers through more localised work and thus reduced travel costs. In more concentrated urban areas where the LSC expects "opportunities for savings from efficiency and greater security of supply of services than in rural areas", reductions to the average travel and waiting costs have been made in the new police station fixed fee scheme and the modified magistrates' courts standard fee scheme.[97]

Travel time and costs

87. In his final report, Lord Carter noted that travel and waiting costs for police station legal aid work rose between 2001-02 and 2005-06 from £55 million to £90 million and that around 20% of the value for all police station costs were for travel (with a further 6% from waiting).[98] According to the LSC, 26% of police station costs were spent on travel and waiting in London as opposed to 18% nationally.[99] As the Criminal Law Solicitors' Association commented in its submission to us, "there may be room for efficiency gains within the London area by reducing the number of firms who travel to distant police stations and courts for individual cases".[100]

88. However, the LECG study on the Carter reform proposals[101] and the literature survey on the cost drivers of July 2005 undertaken for the Legal Services Commission by Professor Moorhead and Professor Cape[102] both indicate that a more nuanced approach to the issue of travel costs in the police station (and magistrates' courts) might be called for. The LECG study found that:

"[…] travel and waiting costs, stressed in the Carter Report as a potential for cost savings with larger contracts, have also often been declining when measured on a per attendance basis. Travel costs per attendance at police stations during 2001-05 declined at a rate of 1.3% per year, waiting costs per attendance rose at 4.3% For magistrates' court the figures were declines of about 3% and 1% respectively."[103]

89. An increase in the number of practitioners' attendances at the police station per case was also identified by Professors Cape and Moorhead in their research, as they found an increase in the number of attendances per case between late 2001 and the first half of 2004 of 6%. "In the last six months of 2001 there were 50,879 police station attendances after a first attendance, but by 2004 the figure had jumped to 86,821."[104] This raise may be explained by an increase in police station practice of 'bail-backs' where a suspect is released after an initial interview on police bail but required to return for further interviews and/or charging. Bail-backs are almost always the result of police action and not initiated by the defence solicitor.

90. Generally, we can see merit in limiting travel costs in geographical areas and for categories of legal aid work where there is ample local supply of legal advice, such as for criminal defence work in most areas of London. It should be incumbent on local legal aid providers to ensure that unnecessary travel costs are not incurred. Factoring in appropriate elements of travel costs in major conurbations to graduated fee schemes is a justifiable step to achieve control over unreasonable travel costs, but care will have to be taken that this does not lead to unsustainably low fee levels.

91. Established police station practice, such as bail-backs, is likely to have contributed to the increase of police station travel costs over the last few years. Therefore, a proper graduation of the police station case fee that took account of the number of attendances, or a time-related banding as in the Magistrates' Courts Standard Fee Scheme, would provide an adequate sharing of economic risk of rises in defence practitioners' travel cost between the supplier and the Government.

92. We do not consider that a case has been made out for the inclusion of travel costs in the fixed or graduated fee schemes for civil and family work. Generally, in social welfare and family law cases it is the client who attends at the legal aid provider's office. It is usually only in cases where the client is immobile, hospitalised or detained that legal aid lawyers have to incur travel costs when providing legal help to clients. Therefore, it is more likely that it would primarily be already vulnerable clients who would require their lawyers to travel.

93. The inclusion of travel costs in the civil and family fees may affect vulnerable clients disproportionately by providing an economic disincentive to providers to take on their cases for fear of incurring travel costs beyond the element provided for in the fixed or graduated fee. This would be exacerbated in rural areas and small towns where provision by civil and family legal aid providers will be more uneven. We therefore disagree with the Government's plans to include them in the fixed fees.

Waiting costs

94. Both Lord Carter[105] and Lord Falconer of Thoroton, the Lord Chancellor,[106] recognised that there was a variety of reasons for waiting costs of legal aid suppliers and that much of those causes were outside the effective control of legal aid providers. While legal aid suppliers should generally be encouraged to make best use of waiting time, there are compelling considerations against the inclusion by the DCA/LSC of waiting costs in the fixed and graduated fee schemes. There is agreement that this cost factor is largely not in the control of the legal aid provider; it would therefore be manifestly unjust to make the provider bear the economic risk of increases in waiting time beyond what is included in the case fee as remuneration for average waiting time. Rather, there should be an economic incentive for the Government to improve police station procedure, court listing practice and case preparation by the CPS or local authorities in order to reduce waiting costs to the legal aid budget.

NOT FOR PROFIT ORGANISATIONS - A SPECIAL CASE?

95. The number of Not-for-Profit (NfP) organisations which hold civil legal help contracts has steadily increased over the last years and, on 31 March 2006, stood at 469.[107] In the categories debt and welfare benefits, NfPs hold the majority of civil legal aid contracts (60 %).[108] Until now, civil legal help provided by NfP organisations has been remunerated on a funded post model according to which the LSC funds fractional or one or more posts within an NfP organisation for legal aid work.

96. In his final report, Lord Carter said of the NfP funding arrangements that it would "not always incentivise effective working"[109] as the funding model paid the same salary for a post-holder regardless of the number of cases started. He therefore proposed to extend the implementation of the new civil and family legal aid fee schemes to NfP providers.[110] The DCA/LSC agreed and proposed to extend the Tailored Fixed Fee Replacement Scheme for civil legal help upon its general introduction to NfP providers.

97. Initially, the fee levels under the LSC's proposal of July 2006 for the Tailored Fixed Fee Replacement Scheme were calculated only on the basis of average case costs of solicitors' firms, which caused considerable concern to NfP organisations as their average case costs were significantly higher than those of solicitors' firms.[111] This difference in average case costs may be partly explained by the fact that solicitors had a higher percentage of matters where there were no complicating factors (67%) compared to NfPs (52%) and that NfP providers were more likely to see clients who had a disability, medical, health or psychological problems.[112] Eventually, the LSC remodelled the fee scheme the fixed fee for both solicitor and NfP suppliers. The revised fees have now been calculated on the average of both solicitors' firms and NfP providers. Thus, on account of the higher average costs per case for NfP providers, the fixed fees have now increased.

98. Under the initial LSC proposals, the draft Regulatory Impact Assessment estimated that 92% of NfP providers would have been faced with a reduction in fees. The new figures would only lead to a reduction in fees for 44% of all NfP providers.[113] However, the Regulatory Impact Assessment does not contain data on the level of reductions NfP providers will have to bear.

99. When we asked the Director of the Advice Services Alliance, the umbrella group of NfP legal aid providers, whether he considered retaining the difference in pay schemes between NfP providers and solicitors justifiable, he informed us that:

"There are mixed views about the principle of having a unified contract. Our position is that it is difficult to argue as a matter of principle that people should be paid on an entirely different basis for doing the same work. We would not want to start by saying that advice agencies should be paid fundamentally differently. The issue is what the terms are on which the payments are being made."[114]

He stressed, however, that:

"[…] one of the biggest concerns raised by our members, is the move from paying in advance at the moment to a situation where you would be paid in arrears. Two things need to be said about that. Firstly, the transitional arrangements for that will need to be very carefully handled because in practice there is a real risk that that will create huge cash flow problems for agencies suddenly moving from one system to another. Certainly our members are very anxious about that. Secondly, that approach to payment certainly does not appear, in our view, to comply with the compact that has been agreed between the Government and the voluntary sector, which does say that in normal circumstances voluntary sector organisations should be paid in advance for work being done. We are not entirely clear why the Commission feels that payment under legal aid contract should be done differently from what is suggested by the compact. That is an issue about which we are also still in discussions with them."[115]

100. Some of these concerns seem to have been addressed by the transitional arrangements agreed between NfP providers and the LSC. Under the Unified Contract in force since April 2007, NfP providers will be paid under a post funding model until the envisaged entry into force of the new fixed and graduated fee schemes in October 2007, but funding arrangements change from quarterly payments in advance to monthly advance payments.[116] From October 2007 while the new fixed and graduated fee schemes will apply also to NfP providers the LSC will continue to make payments monthly in advance for 18 months with reconciliation of the advance payments with actual case work delivered after that time. Eventually, payment arrangements will be aligned with those for solicitors.

101. Not-for-Profit suppliers of legal advice play a crucial and invaluable role in the provision of social welfare advice and assistance to some of the most disadvantaged clients. Yet, where advice centres and comparable other NfP institutions undertake similar work for similar clients to that of legal aid solicitors, the current difference in the level of remuneration is not sustainable in principle. However, care will have to be taken that the transitional arrangements put in place for the adaptation of NfP providers to new remuneration arrangements will allow these organisations to adjust appropriately to the new funding schemes, as the impact of the transition to fixed or graduated fee schemes is likely to be a significantly more difficult process for a large number of NfP providers than for solicitors with an experience of working under the current Tailored Fixed Fee Scheme.

Detailed impact of the new fee schemes

THE CRIMINAL FEE SCHEME

102. In the area of criminal work, practitioners made the point that the new fee schemes created potential for difficulty at police stations where officers, who would all be aware that defence practitioners were on a fixed fee, might 'play the system' by consciously delaying interviews or procedures.[117] In the magistrates' courts or the Crown Court, practitioners, under the new fee schemes would have an economic incentive to advise their clients to plead guilty at the earliest opportunity, as fees will be tapered and concentrated on the earlier stages of a trial.[118]

103. Although both risks may be minimal because of the professionalism of those involved, we are concerned that clients may lose confidence in the system if there is a real or perceived benefit to those who advise them to force an issue to an early conclusion.

The economic impact

104. The modified proposals for fee schemes for police station work of February 2007 and for defence work in the magistrates' courts also raised serious concerns about the financial effects on the criminal legal aid supplier base. The LSC consultation paper Police Station Reforms: Boundaries, Fixed Fees and New Working Arrangements, published in February 2007, states that the calculation of the fee schemes for the new boundary areas in non-urban areas was generally designed to be cost neutral.[119] However, as the LSC intends to make savings on police station legal aid expenditure of £8 million pounds per annum, it plans to implement reductions from historic average case costs of 12.2% in urban areas outside London and 8.3% in boundary areas in London.[120] The LSC justified this on the basis that "in more concentrated, urban areas, there are greater opportunities for savings form efficiency and greater security of supply of services than in rural areas".[121]

105. Similarly, significant cuts in remuneration rates are envisaged under the modified proposals for the standard fees for publicly funded work in the magistrates' courts, which the LSC intends to introduce in urban areas from October 2007. The Regulatory Impact Assessment for the modified magistrates' court standard fee scheme shows the rate cuts for the urban areas in the following table:

Source: Legal Services Commission

106. The Regulatory Impact Assessment explained:

"While the LSC has calculated from 2005/6 data that firm income for magistrates' court work in the main urban areas would be reduced overall by 8%, we would however expect firms to benefit from standard fees as it will allow them to benefit from improvements in their own efficiency. 13% of providers, accounting for 16% of expenditure would have their fee income increased by the new scheme by an average of 4%, and 86% of providers accounting for 84% of current expenditure, if they made no adjustments to working practices, would have their fee income reduced by an average of 12%. […] The impact of the changes is deliberately higher in London (16%) as travel costs reported by London firms are much higher than the rest of the country and we believe there is even greater scope for improvement in efficiency."[122]

In the light of the current economic fragility of the criminal legal aid supplier base, these planned reductions in income for criminal defence practitioners may be prove to be unsustainable. It remains unclear whether criminal legal aid lawyers have the capacity to absorb such rate cuts by changing their working practices or through business restructuring, especially in the short time of the transitional period.

THE FAMILY FEE SCHEMES

107. The DCA/LSC's initial proposals for both public and private law family graduated fee schemes attracted severe criticism from practitioners and senior members of the judiciary. The fee schemes were considered to be too rigid, being fixed fees in all but name. The Care Proceedings Graduated Fee Scheme was particularly condemned for lack of sensitivity to individual cases. Sir Mark Potter, the President of the Family Division, described the initial fee scheme proposals as "a series of extremely crudely averaged fixed fees which says that for step one in the [judicial child care proceedings] protocol, whether you act for father, mother or child, you will get X pounds and so on". He concluded that "the whole thing has to be radically revised".[123]

108. We agree with the criticism and appreciate the LSC's efforts to re-design the fee schemes. However, the new proposals published for consultation in March 2007[124] do not appear to represent a significant shift in the LSC's approach to appropriate fee graduation. While fees for solicitors preparing court proceedings (level 3) are now regionally sensitive and banded according to court level and to the family member the legal aid lawyer is representing, there is still no graduation within each fee depending on the complexity of the case. The Legal Aid Practitioners' Group (LAPG) judged the new proposals in the following terms:

"The structure set out in these revised proposals is a distinct improvement on the proposals from the Way Ahead document, particularly for care proceedings. Nonetheless, we are still sceptical as to whether fixed fee systems can be appropriate for all family work; and we remain seriously concerned that the rates payable under these proposals will not be sufficient to ensure an adequate supplier base for this work."[125]

109. Some considerable improvement to the initial fee scheme proposals may be seen in the lowering of the escape threshold at level 3 of the proposed Care Proceedings Graduated Fee Scheme from four times to just twice the value of the fixed fee.[126] In effect, instead of designing a proper graduation, the LSC now appears simply to have limited the ambit of the graduated fee scheme to 'average' cases and decided to continue to remunerate the more complicated ones on an hourly basis. While this may go some way to solving the problem of the very limited graduation of the fee scheme, it cannot be interpreted as a sign that the LSC has worked out how to design a proper graduated fee scheme for care proceedings. Given that care cases are one of the main areas of significant cost growth in the system, this failure is a significant concern.

The economic impact

110. Particular concerns were raised with regard to the effect of the Care Proceedings Graduated and Family Help Fee Schemes, which the LSC published for consultation on 1 March 2007. The financial impact by region of the Care Proceedings Graduated Fee Scheme (public law) is shown in the following table:[127]

Source: Legal Services Commission

111. The table below shows the financial impact by region of the Family Help Fee Scheme which applies to all advice and assistance and certain elements of court representation in private law family proceedings:[128]

Sources: Legal Services Commission

Again, the Regulatory Impact Assessment does not contain further information apart from the fact that in Manchester, 49% of family help providers would see their income decrease by more than 2%.[129] The Regulatory Impact Assessment for the new Asylum and Immigration Fee Schemes, published on 21 March 2007, notes that 74% of asylum advice and representation providers would see an increase in pay rates, but that in certain regions because of the high percentage of Not-for-Profit providers dealing with asylum cases under legal aid, 63% of cases would be conducted by providers facing a pay cut.[130]

112. Again, we are deeply concerned that the effective reduction in case fees for a significant number of specialist family legal aid suppliers will make it increasingly unattractive to practice in this field of law. It is unlikely that these fee schemes would halt the trend of family lawyers leaving the legal aid system, let alone reverse it.

THE CIVIL FEE SCHEMES

113. Like most other schemes, the proposals for fixed and graduated fee schemes for general civil legal aid work, consisting predominantly of social welfare law cases, and for mental health and asylum and immigration work, have faced criticism for a lack of adequate fine-tuning of the fee schemes.

The economic impact

114. In terms of the financial impact of the Tailored Fixed Fee Replacement Scheme applying to the provision of legal advice in the categories of social welfare law, the Regulatory Impact Assessment[131] for this scheme predicts that nationally 61% of solicitors and Not-for-Profit providers holding a civil contract would see their remuneration increased; over 38% of providers would face a reduction in average payments. However, there was a starkly varying picture across different areas of law and in different parts of the country, as illustrated in the tables below:

(AAP: actions against the police; COM: community care; CON: consumer; DEB: debt; EDU: education; EMP: employment; HOU: housing; MED: clinical negligence; MSC miscellaneous civil cases; PI: personal injury; PUB: public law; WB: welfare benefits)

Source: Legal Services Commission

115. The Regulatory Impact Assessment indicated that almost 68% of London civil legal aid providers would face a pay cut, whereas in Wales only 23% and in Newcastle 20% would suffer a cut in fees. However, the Regulatory Impact Assessment did not contain much information on the anticipated level of pay cuts, it only noted that around 44% of Not-for-Profit providers would be faced with a rate cut and that only 0.7% Not-for-Profit providers and 5.16% of solicitors would see a reduction of their income exceeding 33%.[132] Shortly before we finally agreed this Report, we were sent figures relating to the expected changes in Firms' income under the new transitional fee system.[133]

116. When we asked David Jockelson of the East London legal aid firm Miles and Partners about the anticipated reduction in income under the fee scheme, he told us that the return for 210 cases the firm had done under the current Tailored Fixed Fee Scheme had been £80,000 and was now expected to drop to £50,000.[134] Similarly, Roy Morgan of Wales-based Morgans Solicitors, one of the largest social welfare legal aid providers in the country, estimated that the new fee scheme would see the fee income for his firm in housing cases reduced by 16% and by 39% for work relating to welfare benefits.[135]

117. To date, there has been no significant research which would enable us to judge the potential effect of these rate cuts or increases on the civil legal aid supplier base as a whole, or the social welfare law providers in particular. However, if the Regulatory Impact Assessment proves to be correct, and 68% of providers in London, a city with large areas of social deprivation, face rate cuts, this is likely to have a significant impact on the numbers of providers. Firms may close or merge, solicitors may retire or leave the legal aid market in favour of better paying private work. In evidence, the Lord Chancellor said: "How do you get people to go to places like the North-East, for example, where there is not advice available at the moment? The corollary of the 68% […] of firms who are losers in London (and I'm not saying this is the only winner), for example, in the North-East is a 77% increase. For Wales, [….] a 77% increase in the number of winners."[136] Even in the North-East, however, 21% are assumed to be losers, and no one can predict with certainty the effect of the Tailored Fixed Fee Replacement Scheme or the promised gains. Naturally, we welcome the rates increases for a large number of civil legal aid providers in areas associated traditionally with legal advice deserts, such as Wales or the North East. In theory, this may attract other firms to move into these areas, although we have seen no evidence that this will occur, as even in these areas some 20%-30% of providers still face rate cuts. We doubt, therefore, whether the TFF Replacement Scheme will lead to an increase in the number of providers in these areas of hitherto unmet need. The overall picture this Regulatory Impact Assessment paints in respect of the effect of the TFF Replacement Scheme on remuneration levels for social welfare legal aid will not encourage providers to specialise in these areas of the law.

118. The Carter reforms were intended to ease the pressure on civil and family legal aid. We doubt that the fee levels as suggested would achieve this objective. If at all, it would represent a very uneven easing of the pressure for between 38% to 80% of providers. While we believe that graduated fees as such could be made to work in most areas of legal aid law, we have great sympathy for the criticism voiced by the Civil Justice Council,[137] the Family Justice Council[138] and individual representatives of the senior judiciary[139] with regard to the precursors to the current fee schemes. The Civil Justice Council warned that:

"[…] the proposals, if implemented, carry greater risks in terms of damage to civil legal aid provision, and access to justice, than the minimal financial improvements to the overall legal aid budget. […] The proposals in the consultation paper, however, will not correct the imbalance in what is a fragile civil legal aid supplier base."[140]

119. We see a risk to the supplier base in the current proposal for the civil legal help fee proposals. Imposing national fixed fees on large swathes of legal aid work that rapidly force unit cost cuts in a significant proportion of providers is an exceptionally risky strategy. These providers will be faced with a stark choice between cutting by reducing staff costs and time spent on cases or leaving the legal aid market. A full analysis of the likely effects of the fee structure and levels of the new proposals is needed as a matter of urgency.

THE COMBINED IMPACT OF THE FEE SCHEMES

120. We were warned it would not be enough to look at each individual new crime and civil/family fee scheme in isolation.[141] In criminal legal aid, "firm earnings should be seen as a package of expected earnings from police station, magistrates' court and crown court work",[142] as a large number of firms cross-subsidise their defence work in the police station and magistrates' courts with the economically more viable fees made in the Crown Court. Thus, "reductions in crown and higher court earnings reduce the ability of firms to use these cases to offset lower earnings elsewhere".[143] The overall effect on the supplier base of the planned rate cuts in urban areas, combined with eventual cuts to the average return on cases in the Crown Court, could thus be stronger than the individual rate cuts might suggest.

121. Sir Anthony Clarke, the Master of the Rolls, also warned of the potential spill-over effects of the reforms of criminal legal aid on civil and family legal aid. He noted that the criminal legal aid reforms "may give rise to quite a radical shake-up of firms" and warned:

"Maybe they are designed to do that, but at present some firms do crime, civil and indeed family. If the result of this shake-up were that some of those existing firms might go out of business, one does have to ask what is going to happen to the people in those firms who are presently doing civil and perhaps also family."[144]

The Civil Justice Council concluded that this would have a highly detrimental effect on the supply of civil legal aid services, particularly in areas such as social welfare law.[145] Little appears to be known of the impact on the 39% of firms that do civil and family work as well as crime of changes to the way criminal legal aid is procured and remunerated.[146]

CONCLUSION

122. As the regional financial impact figures for the Tailored Fixed Fee Replacement Scheme, the family fee schemes and the police station and magistrates' courts fee schemes indicate, their proposed implementation in October 2007 will have considerable negative financial consequences for a significant number of legal aid suppliers, especially in major urban areas.

123. We agree that remuneration solely on the basis of time spent on a case is a disincentive to dealing with cases efficiently. Continuing the journey away from remuneration of publicly funded legal services on the basis of hourly rates towards remuneration on a per case basis, whether the price is set administratively or through competitive tendering, is therefore the right course of action.

124. However, fairness in remuneration demands that the rate for dealing with a legal aid case, be it in the field of criminal law, civil or family law, should ideally be based on objective criteria that adequately capture the complexity of cases and allow a more accurate determination of the likely work which a provider has to invest in a case in order to deal with it appropriately.

Lack of adequate data

125. Administrative setting of per case fee schemes can only lead to satisfactory results where the LSC holds the right data and has a general understanding of variations in case costs across different geographical areas and categories of legal aid work. However, the Access to Justice Committee of the Civil Justice Council commented in its response to the DCA/LSC initial civil and family fee scheme consultation paper of July 2006 "we are not convinced that any research or analysis has been undertaken to explore the reasons for there being different costs for different cases as between firms, areas of the country, or within each case category".[147]

126. With regard to the DCA/LSC proposals for a Care Proceedings Graduated Fee Scheme, the Association of Lawyers for Children noted in its written evidence that:

"The figures supplied by the LSC are derived from a data collation system created for administrative use. The proposed system is calculated on certificates not cases. The data shares the same inherent inadequacies as that produced for the CCPR [joint 2006 Child Care Proceedings Review carried out by the DCA and Department for Education and Skills]. It cannot provide case management and costing information upon which reasonable decisions can be based. The LSC is unable to assess the cost of each case, or its parts. The irrationality of a per certificate basis for standard fees rather than a per case renders the present calculations completely inadequate."[148]

When we asked Professor Masson to comment in writing on the most recent revised LSC proposals for the Care Proceedings Graduated Fee Scheme of March 2007, she reiterated that the LSC still did not have adequate data on case characteristics to determine case costs correctly for the structuring of the graduated fee scheme and the setting of fee levels.[149]

127. Where the LSC embarks upon the creation of a comprehensive system of fixed and graduated fee schemes intended to provide a sustainable basis for the future of the legal aid market, fair to both the suppliers and the tax payer, it can only do so meaningfully on the basis of adequate knowledge of the reasons for variations in case costs between firms, areas of the country and within each category of legal aid. This knowledge presupposes collection of the right data and of statistical research. It appears that the LSC has inadequate information on which to base its proposed fixed and graduated fee schemes.

128. Equally, there is very little reliable statistical information about the economic situation of the legal aid supplier base on which valid predictions of the impact of changes to remuneration or procurement arrangements could be based. The Government does not have all the information required to assess the true impact on legal aid suppliers of the reform proposals, especially of the new fee schemes on the legal aid market. It cannot know if, and how, legal aid suppliers in different regions and categories of the law will be able to absorb the planned rate cuts, especially in London and other urban areas, if it does not have sufficient detailed information about the economic situation of legal aid suppliers by region and contract category. Furthermore, the evidence it does have points to significant problems in forcing radical change on the profession.

129. We appreciate that, as Sir Michael Bichard, the Chairman of the LSC, pointed out to us, it is extremely difficult to draw conclusions about how the firms are going to respond to a very different set of circumstances.[150] In the light of this uncertainty and the general lack of data, the DCA/LSC's intention of a nationwide imposition of fixed fees followed rapidly by competitive tendering across the entire legal aid system is a breathtaking risk. It puts a great deal of faith in economic argument in the teeth of LSC commissioned evidence which casts doubt on the capacity of supplier to respond. This risk might be justified where the whole system is in utter crisis but large parts of the system (especially non-family civil legal aid) are stable in cost terms. We recommend a reconsideration of the plans and the adoption of a much more measured, risk-based strategy for reform.

Risks in the transitional period

130. The preceding analysis of the anticipated financial impact of the new or modified fee schemes for the transitional period prior to the introduction of competitive tendering in October 2008 and April 2009 indicates that they pose a considerable risk to the stability of an already fragile legal aid market. Suppliers fear that the transitional fixed and graduated fee schemes, which would only be in operation for a period of between one and three or four years, might prove not to be economically viable for them. They believe that they might have to leave the legal aid market in order to survive.

131. Larger criminal legal aid suppliers especially have warned us in their submissions that, whilst they were well positioned for competitive tendering, they might find the transitional period with its new fee schemes the most challenging part of the reform process.[151] The Law Society commented that this problem might even be more acute for smaller suppliers.[152] These fears were echoed in the Otterburn study on the impact of the Carter reform proposals: "we are concerned that any reductions in fees paid during the transition before firms have had an opportunity to increase their efficiency will force firms into financial difficulty."[153]

132. The long-term impact on supply might not be serious: if firms closed, many of their fee earners would switch to other firms. However, in the short term the disruption to supply could be significant.[154] Otterburn agreed with the LECG study that "the proposals represent major change and that it is difficult to anticipate fully potential problems and where they might occur," and cautioned:

"[…] as far as financial evidence is concerned, there is actually very little reliable up to date available to the Commission. This Report has relied heavily on the small sample of large crime firms as that is the only reliable, recent data available, however that is not representative of the supplier base as a whole. As a result considerable caution is needed in proceeding with reforming criminal legal aid procurement.[155]

133. The short term introduction of transitional fixed and graduated fee schemes at breakneck speed will not allow providers to make best use of what should be a transitional period in which firms can carry out carefully planned business restructuring, where potential for efficiency gains in restructuring exists at all. Quality legal aid suppliers might be forced out of the legal aid market on grounds of the income reduction expected in the transitional period before they even have a chance to compete on the basis not just of price but also on quality in the best value tendering process.

134. We strongly recommend that the Government reconsider the timing and comprehensiveness of the reforms. The problem areas of the legal aid budget (Crown Court defence work and child care proceedings) should be addressed swiftly, but we fail to see the need for potentially short-sighted transitional arrangements for legal aid remuneration in anticipation of the roll out of competitive tendering from October 2008, where there are already mechanisms for controlling unit costs or where the costs of cases appears to be under control. We can see merit in time in moving beyond Tailored Fixed Fees for instance, but the desire to impose inflexible national fixed fees against a shaky evidence base is unwise in the extreme. It is more so given the proposed move to competitive tendering. The LSC's time would be far more wisely devoted to designing an appropriate system of competitive tendering, than it is to designing and implementing a suite of reforms which are fraught with difficulties and which are, in any event, only likely to be in place for a short period of time.

135. Given the current fragility of the legal aid supplier base and the time suppliers will need to restructure their businesses where necessary, the introduction of ill-thought out new fee schemes, which are predicted to result in significant reductions in income for a considerable number of suppliers for little more than one to three years' time prior to competitive tendering, poses a great risk for suppliers and clients alike. The introduction of these fee schemes for the short transitional period should therefore be halted.

65 Q346 Back

66 Lord Carter's Review of Legal Aid Procurement, Legal Aid: A market-based approach to reform, p25 Back

67 Ibid, p 26 Back

68 Ibid, p 27 Back

69 Ibid, p 4 Back

70 In the Carter report and the simultaneous DCA/LSC consultation paper Legal Aid; a sustainable future, CP 13/06, July 2006 Back

71 DCA/LSC, Legal Aid Reform the Way Ahead, Cm 6993, November 2006 Back

72 DCA/LSC, Legal Aid Reform: the Way Ahead, Cm 6993, November 2006, p 27; LSC, Legal Aid Reform: Family Law and Family Mediation Fee Schemes, March 2007, p 3; LSC, Legal Aid Reform: Final Immigration and Asylum Fee Schemes, March 2007, p 9; LSC, Police Station Reforms: Boundaries, Fixed Fees, and New Working Arrangements, February 2007, p 13 Back

73 LSC, Legal Aid Reform: Family Law and Family Mediation Fee Schemes, March 2007, p 10 Back

74 Qq 281, 282 [Rodney Warren]; Q 223 [David Emmerson]; Q 192 [Richard Jenner] Back

75 Q 138 Back

76 Q 223 Back