Cost of motor insurance: follow up - Transport Committee Contents

Written evidence from Mark Boleat


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.


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.


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.


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.


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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Prepared 12 January 2012