Legal Aid, Sentencing and Punishment of Offenders Bill

Memorandum submitted by the Association of British Insurers (LA 47)

THE ABI’S OVERARCHING MESSAGE

We like what we have seen so far in the Legal Aid, Sentencing and Punishment of Offenders Bill but you need to go further and ban referral fees, bearing the following points in mind:

1) Fixed fees and hourly rates must be reduced accordingly in order for a ban to have any benefit for claimants and consumers;

2) A ban must be implemented properly to ensure that the problem doesn’t emerge elsewhere (bearing in mind the impending introduction of ABS’);

3) A ban is necessary to stamp down on fraudulent whiplash claims, which are becoming increasingly problematic.

We also want to ensure that the detail of secondary legislation is carefully considered and that the timetables for implementation are realistic and aligned so that the "Jackson package" is implemented as Jackson LJ intended.

KEY POINTS

§ The ABI supports the Legal Aid, Sentencing and Punishment of Offenders Bill and is keen to engage and provide support to the government, MPs and Lords as the Bill goes through Parliament.

§ The ABI does however want the Jackson reforms implemented in full and as a comprehensive package. The danger of not implementing all elements of Jackson is that a piecemeal approach could lead to unforeseen consequences. The most undesirable of these would be increased costs for insurers and claimants and increased premiums for consumers.

§ In particular the ABI want the government to take action on referral fees which fuel the compensation culture and create unnecessary costs. A ban on referral fees is necessary to strike at the tactics of predatory CMCs and to reduce costs in line with the objectives of the Jackson Report.

§ The ban on referral fees should be introduced alongside a corresponding reduction in the level of fixed costs and guideline hourly rates. Fixed costs and solicitors’ guideline hourly rates currently take into account the costs of these referral fees and so if referral fees are banned there will be no need to have costs set artificially high as they are now. Removing referral fees and reducing solicitors’ costs will help to achieve the Government’s objective to reduce the costs of civil litigation.

§ The ABI has submitted its response to the consultation on ‘Solving Disputes in the County Court’ which again is broadly supportive of the government’s proposals and particularly the expansion of the RTA Portal to a wider class of claims. The ABI is supportive of fixed costs regimes but these costs must be set at reasonable and sustainable levels.

WHY SHOULD REFERRAL FEES BE BANNED?

§ Referral fees should be banned as they contribute to disproportionately high legal costs without adding value to the service provided to the claimant. The current fixed costs in the RTA Portal (not including success fees) are £1200 – with some referral fees reaching £900 the claimant lawyer is still making a net income of £300. If claimants are able to run claims at £300 for a profit the fixed costs already in place need to be reduced.

§ Removing the referral fees and lowering the current fixed costs and hourly rates will more accurately reflect the activity required to run these claims. Acquisition costs of 75% (in the above example) cannot be tolerated.

§ Fixed costs should be set to reflect the volume of work required when processing a claim. In general terms, the work required by a claimant solicitor for straightforward liability-accepted claims is the same for claims with a value of £5k or £25k.

§ Similarly, the guideline hourly rates recommended by the Advisory Committee on Civil Costs (ACCC) are fixed to include the "marketing costs" of claimant lawyers – i.e. referral fees. If referral fees are removed from the system then these guideline hourly rates can be reduced. As the ACCC acknowledges, defendant solicitors’ rates are typically 20-35% below those charged by claimant solicitors – enabling the payment of hugely disproportionate referral fees.

§ It is no secret that insurers accept referral fees. Competition law, however, prevents insurers from collectively agreeing not to receive referral fees - even if insurers did collectively stop receiving them this would not stop others, including claims management companies, police and trade unions, from doing so, continuing to inflate solicitors’ fixed costs and hourly rates.

§ Insurers have been accused of misusing their customers’ data – this is simply not true. Customer data is shared so that the insurer can assist claimants get the advice that they need.

§ The LSB report on referral fees did not look at the issue of referral fees in the wider context. The scope of the LSB report was too narrow and the pool of 25 PI claimants interviewed by Vanilla Research (10 of which by telephone) far too small. The report disregarded the views of almost all of the respondents (including insurers and the Law Society) who disagreed with the analysis of the referral fee market by the LSB, even if they had differing opinions on referral fees in general.

§ Transparency does not solve the problem - if anything, the costs of regulating it will mean that additional costs are layered into the system. The LSB’s decision to pass the buck to individual regulators means that referral fees can continue to drive up costs elsewhere in the claims process even if, for instance, the SRA were to take steps to ban the payment of referral fees by and between solicitors.

§ Even the lawyers – who have very different priorities to insurers, e.g. The Law Society and the Bar Council - agree that referral fees should be banned.

§ The recent media coverage has framed the issue as the "uncovering of a scandal", but this issue has been a concern of the ABI’s for a long time. We have been calling for a ban for months – our response to the LSB consultation submitted in December 2010 was clear in this respect.

July 2011

Prepared 7th September 2011