House of Commons - Public Accounts

Select Committee on Public Accounts Twelfth Report

2 The cost of administering the Schemes

17. By the time all claims are processed the National Audit Office has estimated that for every £2 paid in compensation, over £1 will have been spent on administrative costs, which are forecast to total £2.3 billion. Almost £1 billion will be attributable to the cost of the Department's claims handlers, medical contractors, the cost of retrieving miners' employment records and its own legal advisers (Table 3). The Department's claims handler, Capita Insurance Services, won a competitive tender for the work in 2006 after buying the previous contractor, Aon in 2004.[18]

Table 3: The cost of processing claims

	COPD Estimated Final Outturn £million	VWF Estimated Final Outturn £million	Total £ million
Solicitors' costs	1,122	173	1,295
Medical costs	394	32	426
Other allocated	1	1	2
Claims handling (*)	273	207	480
Record extraction (*)	38	10	48
Legal services (*)	20	20	40
Total	1,848	444	2,292

Average cost per claim	3,100	2,600

Note (*): The Department does not break down by scheme its contractor costs. Its contractors receive composite payments covering the work done on all types of health claim, including COPD, VWF and other residual claims. In addition, the Department has not separately identified its in-house costs by scheme. The costs here have been apportioned based on a National Audit Office analysis of applied resources.

Source: National Audit Office analysis of Departmental data

18. Over 56% of the total cost will be attributable to the fees paid to the claimants' legal representatives which, when all claims are settled, will be in the order of £1.3 billion. The cost of legal representation was reimbursed under a fees tariff structure agreed in negotiation between the Department and the Solicitors' Group at the start of the schemes. Fees were only payable if claims were successful. At 31 March 2007, ten organisations had accounted for 61% of the amounts paid out (Table 4).[19]

Table 4: Fees paid to claimants' representatives

Total payments to the top 10 claimants' representatives by coal health fee income as at 31 March 2007
	Ranking	Total £m	Number of partners
Thompsons	1	123.6	36 equity partners plus 16 salaried partners (*)
Beresfords	2	115.0	3 partners
Hugh James	3	90.2	47 partners
Raleys	4	72.4	Declined to respond
Browell Smith & Co	5	54.6	Information not supplied
Mark Gilbert Morse	6	52.4	Information not supplied
Avalon	7	35.1	9 partners
Union of Democratic Mineworkers	8	31.6	Not applicable
Watson Burton LLP	9	31.3	Information not supplied
Graysons Solicitors	10	29.7	9 partners
Total		635.8

(*) Figures do not include Thompsons Edinburgh

Note: Figures do not cast correctly due to rounding

Source: Department for Business, Enterprise and Regulatory Reform: Information on number of partners supplied in response to a letter from the Department

19. Claimants' representatives, usually solicitors, were funded to provide a range of services. These included providing information to potential claimants about the schemes, for example details on the process involved and the criteria governing entitlement; advice, for example in the case of COPD claims whether to pursue a fast-track settlement or opt for the full medical assessment; assistance with the completion of various forms; and advice to the client on any offers made. In some cases, solicitors pursued issues not envisaged in the original claims handling agreement, for example the position of surface workers who might have inhaled dust.[20]

THE SOLICITORS' FEES NEGOTIATED BY THE DEPARTMENT

20. There were weaknesses in the Department's approach to negotiating the original tariffs with solicitors. The negotiations had taken place in the midst of uncertainty over the volume of claims and the practical operation of the schemes. Once negotiated, however, the tariffs were expected to operate for the life of the schemes with fees increased annually in line with inflation. As a result, the Department was effectively tied. At the time of the original negotiation, the Department believed that the schemes would be closed as early as 2001. The Department now accepts that the absence of a review clause in the agreements, allowing a review of tariffs in the light of experience, was an error.[21]

21. The structure of the tariffs also favoured solicitors who handled a large volume of claims. The estimates prepared for the Department on both VWF and COPD, for example, had considered the processing of each claim as a discrete piece of work. The estimates therefore took no account of the economies of scale to be gained from processing large numbers of claims within the firms. As a consequence, the large amounts paid to some solicitors firms are significantly greater than the actual costs those firms incurred.[22]

22. Furthermore, a report by a Senior Costs Judge in early 2007 suggested that the fees payable under the COPD Claims Handling Agreement were higher than the costs that would be awarded following a conventional detailed assessment (Table 5). The National Audit Office estimated that, on the basis of the Cost Judge's findings, the total amount payable by the Department to solicitors could have been £295 million less.[23]

Table 5: Estimates of COPD legal costs prepared by Senior Cost Judge (February 2007)

Category of case	Assessment by Senior Cost Judge	Cost payable under the Claims Handling Agreement
Claim following full medical	£922	£2023
Widow and estate claims following full medical	£985	£2023
Expedited settlement	£725	£1061

Source: Court Judgement (3 April 2007): High Court of Justice, Queen's Bench Division (Neutral Citation Number: [2007] EWHC 672 (QB), Case No: 960177. [24]

23. The tariff structure has also thrown up some anomalies. Under the structure, a flat fee, varying according to the type of case, was payable irrespective of the amounts won for the client. In the case of COPD, the smallest amount awarded in compensation was as small as 50p yet solicitor costs alone in this case totalled £1,974. In November 2006 a Minimum Payment Scheme was introduced whereby claimants receiving offers of £500 or less had their money increased to £500 by their solicitors from the solicitors' own funds. The Department acknowledged that the agreement to guarantee these minimum payments had taken too long to achieve, though it had depended on the response from solicitors.[25]

REDUCING THE LEVEL OF FEES

24. The Department has sought to negotiate down the legal fees where changes to the processing of claims have presented a justifiable reason. The Department believed the original tariff should not be applied to the fast-track arrangement introduced in 2005, as the level of work required would be lower. The Claimants Solicitors' Group contested this argument. The Scheme Judge ruled against the Department. On appeal the Department won a review of this decision. In April 2007, the High Court ruled that the fees for fast-track schemes should be set at levels lower than those in the original agreements. The Department expects this ruling to reduce the cost to the taxpayer by up to £100 million, and expected solicitors to repay £80.6 million of fees already paid over. Of this amount, some £50 million was owed by the 10 firms that had already earned most from these schemes (Table 6). By early November 2007, the Department had recovered £41.8 million of the £80.6 million. The Court has set an end date of 31 March 2008 for repayment of these debts. The Department reported that those with any outstanding debt at that point will be asked to make a final lump sum payment.[26]

Table 6: Total amount owed to the Department, prior to repayment, from the top 10 claimants' representatives in respect to COPD fast-track fees

	Firm	Amount sought by Department
1.	Thompsons	£5,171,000
2.	Beresford	£13,817,000
3.	Hugh James	£5,781,000
4.	Raleys	£5,442,000
5.	Browell Smith & Co	£4,211,000
6.	Mark Gilbert Morse	£1,169,000
7.	Avalon	£8,538,000
8.	Union of Democratic Mineworkers	£2,342,000
9.	Watson Burton LLP	£2,448,000
10.	Graysons Solicitors	£1,796,000
Total		£50,714,000

Source: Ev 17

25. In addition, for the VWF scheme, following negotiations and mediation, the Department has recently reached agreement on the tariff for successful services claims.[27] The Department estimated that this tariff would reduce costs by £20 million compared to those put forward by the Claimants Solicitors' Group.[28]

ADDITIONAL CHARGES TO CLAIMANTS FROM SOLICITORS

26. Some solicitors have deducted additional fees from the compensation paid to claimants. In some cases, claimants also had to pay fees to companies, known as claims farmers, which had invited applicants to submit their claims via them but in practice had simply passed their application on to a solicitor. In 2001, the Department raised the issue of additional charges with The Law Society, which argued that the charges were not improper provided the client had been informed in advance as to the charging arrangements and the amounts were not unreasonable. In 2003, the Department wrote to all solicitors requesting an assurance that they would not impose additional fees. Those solicitors who did not comply were removed from the list of solicitors provided to all potential claimants, although this did not preclude claimants using these solicitors if they wished. The Department wrote again in June 2007. The Department believes that around £3 million has been refunded by solicitors but no firm figures are available.[29]

27. The Department suggested this episode had highlighted disappointing professional behaviour. By October 2007, the Legal Complaints Service, an independent arm of The Law Society established in 2006, had recovered some £720,000 from 15 firms and three firms had been referred to the Solicitors' Regulatory Authority. On the issue of claims farmers, the Department reported that its experience had influenced the broader action taken by Government on claims farmers. In particular, under the Compensation Act 2006, the Ministry of Justice has created a Claims Management Regulation Monitoring and Compliance Unit to regulate this sector. A person offering claims management services must now, unless specifically exempt, be authorised to do so by the regulator.³⁰[30]

18 Q 85; C&AG's Report, paras 5, 1.7, Figure 8 Back

19 Q 40; C&AG's Report, para 3.22, Figure 8, Appendix 7 Back

2 20 0 C&AG's Report, para 3.21 Back

2 21 1 Qq 18, 70, 76 Back

2 22 2 C&AG's Report, para 3.24 Back

2 23 3 Qq 7, 8, 77, 79; C&AG's Report, para 3.27, Figure 10 Back

2 24 4 Citation Number: [2007] EWHC 672 (QB),Case No: 960177. This judgement can be found at http://www.bailii.org/ew/cases/EWHC/QB/2007/672.html Back

25 Qq 16, 18, 72, 75 Back

26 Qq 7, 44; Ev 17; C&AG's Report, para 3.28 Back

2 27 7 These are claims to compensate claimants for assistance with tasks the disease sometimes prevents them undertaking, for example gardening tasks. Back

2 28 8 Q 7; Ev 12; C&AG's Report, para 3.28 Back

2 29 9 Qq 19, 22, 80, 92; C&AG's Report, para 3.30 Back