Written evidence from Mark Boleat
INTRODUCTION
The issue of referral fees has reappeared on the
political agenda. This note briefly considers the issue. The author
has some qualification to comment as the former Head of Claims
Management Regulation and someone who has considerable experience
in regulation, including as a member of the Regulatory Policy
Committee.
HOW THE
PERSONAL INJURY
MARKET WORKS
Low value personal injury claims typically are introduced
to solicitors by intermediaries. The chance of someone seeking
to make a claim for say £4,000 finding a suitable lawyer
on their own initiative is very small. While many lawyers may
say they are willing to handle personal injury claims, at any
point in time a particular lawyer may not want to take on more
claims because they do not have the capacity to run them or a
particular claim may not be one that the lawyer is experienced
in handling either because of the nature of the claim or because
of the circumstances of the client.
There is also no guarantee that the business coming
directly to a solicitor automatically means that the solicitor
is acting in the best interests of the client and is independent.
Solicitors are in business to make money, and the extent to which
they will make money on particular cases inevitably influences
their willingness to take on those cases.
Low level personal injury cases are not going to
happen without an effective marketing campaign. A solicitor wanting
to do personal injury business who does no marketing or who pays
no referral fees, but rather relies on an entry on the APIL website
together with an entry in the Yellow Pages will get very little,
if any, business. Indeed, so low (and therefore at a high unit
cost) will be the volume of business that they may well not be
able to handle it effectively. A solicitor who wants a sufficient
volume of business so as to be able to take advantage of economies
of scale and to be able to offer the necessary specialism can
do one or more of the following:
— Direct
advertising locally, regionally or nationally.
— Advertise
through collective arrangements with other solicitors such as
those operated by Injury Lawyers 4U or National Accident Helpline.
— Employ
staff whose responsibility it is to generate personal injury cases
by establishing the necessary contacts, for example with insurance
brokers and accident repair centres.
— Pay
fees to businesses that are able to introduce cases that in turn
must have used one or more of these methods.
Introducers vary from those introducing leads, a
small proportion of which may turn into actual cases capable of
being run, to those that undertake much of the sifting and preliminary
analysis that would otherwise be done by a solicitor, producing
cases the vast majority of which are ready to be run.
Some figures may help to illustrate the point. A
solicitor business may judge that it needs 400 cases a year to
be able to employ the necessary legal and other expertise and
to take maximum advantage of economies of scale in respect of
case handling. It may also work out that the maximum it could
afford to pay to attract that business and still make an adequate
profit is £200,000, that is an average of £500 a case.
It could spend that £200,000 by:
— Paying
for direct local and national advertising, eg in the local press
and radio, on Classic FM or on daytime TV.
— Contributing
to a collective advertising arrangement through Injury Lawyers
4U or National Accident Helpline.
— Paying
four business development managers to get business, who in turn
would be partially rewarded on a commission basis.
— Buying
1,000 raw cases at £200 a lead of which 60% would prove not
to be worth running.
— Buying
400 "oven-ready" cases at £500 per case all of
which could successfully be run.
— Any
combination of the above, eg £30,000 on local advertising,
two businesses development managers and buying some raw leads
and some "oven ready" cases.
It is a business decision as to which method or combination
of methods should be used. Different businesses will have different
approaches and the same business may change the balance of its
marketing effort over time.
Use of the term "Referral Fee" or
"Commission" is misleading. By using introducers
solicitors are merely outsourcing part of what they would otherwise
have to do themselves. Outsourcing itself does not threaten a
solicitor's ability to act independently or in the best interests
of the client anymore than where work is done in-house. For example,
a small solicitors' practice wholly reliant on personal injury
work is itself vulnerable for this reason. Similarly, solicitors
wholly reliant on conveyancing are vulnerable if there is a downturn
in the housing market, which may cause them to move into other
areas of business in which they are not really competent.
EVIDENCE
There is, sadly, little empirical evidence on how
the market for personal injury cases works. One useful piece of
work was the report on referral arrangements and legal services
prepared for the strategic unit of the Law Society by Moulton
Hall in June 2007. Among the points made in the executive summary
of this report were:
— On
average the number of PI cases conducted by firms paying referral
fees was 100 times that of those who are not paying "There
is very little work available in the PI market unless it is paid
for".
— Firms
which do not pay for referrals rely solely on their reputations,
work from previous clients and other solicitors "Few firms
use traditional advertising methods, as the amount of marketing
they would need to do in order to compete with introducers and
generate any potential clients is prohibitively costly".
— Paying
referral fees has enabled firms working in PI to stay in business.
The number of cases and profits has increased when a high volume
of cases has been achieved. Service levels have been maintained
or improved by adopting new business methods.
More recently the Legal Services Board Consumer Panel
has looked in detail at referral fees. It concluded:
"The Panel has its reservations about referral
arrangements and considers that action is needed to tackle concerns
which cause, or have the potential to cause, harm to consumers.
This report identifies those concerns and suggests some corrective
actions. Nevertheless, the Panel recommends that referral arrangements
continue to be permitted, as in both the conveyancing and personal
injury markets the worst of the alleged problems are not substantiated
by the evidence. Further, the marketing and the hand-holding role
performed by claims management companies and not-for-profit bodies
has widened access to justice."
The Legal Services Board's study of referral fees
thoroughly examined the case for and against the payment of such
fees by solicitors, including the impact on costs and the independence
of legal advice. It accepted the view of the consumer panel that
there was not sufficient detriment to consumers to merit a ban
on such fees but there were concerns about transparency.
THE CONSEQUENCES
OF BANNING
REFERRAL FEES
If referral fees were banned the consequences are
very predictable:
— Solicitors,
individually or collectively, would acquire claims management
companies or employ claims farmers directly.
— Solicitors
would increase their own marketing spend.
— When
ABSs are introduced the larger claims management businesses would
acquire solicitors.
— Referral
fees would continue to be paid but suitably disguised (as was
the case when referral fees were banned). For example, a solicitor
would pay for advertising in a car hire business, but the advertising
charge would be paid only in those months when a set number of
referrals had been made.
CONCLUSION
There is no question that referral fees are high,
but that is a symptom of the CFA arrangements that government
has mandated. Fees are a symptom of the problem, not the cause.
Banning them would have no effect on legal costs but would merely
make something that is currently reasonably transparent into something
totally opaque. The other Jackson reforms that are being implemented
should have the desired effect of cutting the fat in the system,
which should automatically reduce the scope to pay acquisition
costs, whether by advertising, paying referral fees or any other
means.
October 2010
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