Draft Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Referral Fees) Regulations 2013
The Committee consisted of the following Members:
† Ashworth, Jonathan (Leicester South) (Lab)
† Burden, Richard (Birmingham, Northfield) (Lab)
† Campbell, Mr Ronnie (Blyth Valley) (Lab)
Corbyn, Jeremy (Islington North) (Lab)
† Crockart, Mike (Edinburgh West) (LD)
† Davies, Geraint (Swansea West) (Lab/Co-op)
Ellison, Jane (Battersea) (Con)
† Fuller, Richard (Bedford) (Con)
† Hands, Greg (Chelsea and Fulham) (Con)
† Hart, Simon (Carmarthen West and South Pembrokeshire) (Con)
† Javid, Sajid (Economic Secretary to the Treasury)
† Luff, Peter (Mid Worcestershire) (Con)
† McKinnell, Catherine (Newcastle upon Tyne North) (Lab)
† Malhotra, Seema (Feltham and Heston) (Lab/Co-op)
† Mills, Nigel (Amber Valley) (Con)
† Shannon, Jim (Strangford) (DUP)
† Vickers, Martin (Cleethorpes) (Con)
† Williams, Stephen (Bristol West) (LD)
Anna Dickson, Committee Clerk
† attended the Committee
Fourth Delegated Legislation Committee
Wednesday 19 June 2013
[Dr William McCrea in the Chair]
Draft Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Referral Fees) Regulations 2013
8.55 am
The Economic Secretary to the Treasury (Sajid Javid): I beg to move,
That the Committee has considered the draft Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Referral Fees) Regulations 2013.
Welcome to the Chair, Dr McCrea.
The regulations concern the ban on referral fees introduced by the Legal Aid, Sentencing and Punishment of Offenders Act 2012, or LASPO. They provide for implementing the ban in two specific areas. First, they provide for the ban on referral fees to apply to certain types of financial services firm—namely those in the insurance sector. Secondly, they provide for the enforcement of the ban by the Financial Conduct Authority.
I will explain the rationale for the ban on referral fees. In 2009, a review of civil litigation costs was conducted by Lord Justice Jackson. It considered the rules and principles governing the costs of civil litigation in England and Wales. It also made recommendations to promote access to justice at proportionate costs.
Lord Justice Jackson’s report set out a number of proposals to tackle the disproportionate costs of civil litigation. The major recommendations include: reforms to no win, no fee agreements; recovery of success fees and after-the-event insurance premiums; qualified one way costs shifting, and a ban on referral fees. The Ministry of Justice accepted Lord Justice Jackson’s recommendations, and rules against referral fees in personal injury cases were included in the LASPO Act.
The rules cover both the payment and the receipt of referral fees. Referral fees are typically paid by solicitors to third parties who refer business to them. Most personal injury claims are referred to solicitors by claims management companies. However, others, such as insurance firms and insurance intermediaries, are often involved. Typically, if policyholders contact insurers to make a claim on, for example, their motor insurance policy, the insurer may check whether there is a related personal injury claim. If there is, insurers will refer the case to a lawyer in return for a fee. If the case is successful, the lawyer’s costs, including the referral fee, would be recovered from the losing defendant. In many cases, the losing defendant could be another insurance company.
Referral fee payments have increased from around £250 per case in 2004 to around £800 per case in 2009. Lord Justice Jackson recommended that the payment and the receipt of referral fees should be banned. A ban would discourage lawyers from bringing unnecessary claims for compensation, including unmeritorious, lower-value claims.
A ban on the payment and the receipt of referral fees should help reduce the overall level of legal costs in personal injury cases and related insurance costs. Both the Law Society and the Association of British Insurers raised concerns that the circular flow of money generated by referral fees incentivises and rewards making claims. That inflates the cost of claims and, ultimately, insurance premiums. According to the ABI, the average insurance premium increased by approximately 10% from 2009 to 2010 to make up for insurance underwriting losses of over £2 billion in 2010, when 20p was lost in every £1 of premium earned.
The ban captures all the main businesses involved, such as solicitors, claims management companies, insurers and insurance intermediaries. Under the provisions of the 2012 Act, the individual regulators in each sector are required effectively to enforce the ban. For regulated financial services firms, the relevant regulator is the FCA.
I will explain briefly the specifics of the regulations. Sections 56 to 60 of LASPO introduced rules against the payment and the receipt of referral fees for legal services in personal injury cases. The ban on the payment and the receipt of referral fees generally came into effect on 1 April.
The 2012 Act confers two main powers on the Treasury that are exercised through the regulations. The first relates to the scope of the ban, and the second relates to its monitoring and enforcement.
Turning to the first, the ban on referral fees applies only to financial services firms of a type described by the Treasury in regulations. The regulations specify the financial services firms to which that ban applies. It is applied to those primarily conducting insurance and insurance mediation or those in the same group as such persons.
Secondly, the 2012 Act provides for the FCA to be the regulator for financial services firms. It allows the Treasury to adapt the existing regulatory powers of the FCA to this new regulatory function. The FCA has existing powers under the Financial Services and Markets Act 2000 to supervise, monitor and enforce regulatory requirements imposed on financial services firms. That will enable the FCA to use those powers to enforce the ban.
The ban will mean that insurers and insurance brokers are likely to incur compliance costs to ensure they are not in breach of the ban. Firms can also expect to be subject to monitoring by the FCA and enforcement action where breaches are identified. The FCA has published a guide to firms on how it will supervise the ban on referral fees. It has also been engaging with firms affected by the regulations to ensure that they are in a position to comply with the ban.
In conclusion, the regulations provide for the implementation of a ban on referral fees in the financial services sector. For those reasons, I commend them to the Committee.
9.1 am
Catherine McKinnell (Newcastle upon Tyne North) (Lab): It is a pleasure to serve under your chairmanship, Dr McCrea, I believe for the first time. I should declare at the outset that I am a solicitor, although non-practising.
Labour was against referral fees long before the Government, partly because we said that the reforms in Lord Justice Jackson’s review of civil litigation costs, which recommended the ban we are debating, should be taken as a package and not cherry-picked. There have been concerns about some of the Government’s cherry-picking in implementing the reforms as part of the Legal Aid, Sentencing and Punishment of Offenders Act 2012. However, that is a debate for another day.
While the Government blamed only claimant lawyers and claims management companies, we pointed out from the start that insurance companies were some of the worst offenders when it came to abusing their position and selling personal information or paying referral fees. Therefore, we were glad when the Government changed their mind and finally included them in the Act, following a campaign led by my right hon. Friend the Member for Blackburn (Mr Straw) against them and other personal injury scams.
The problem is real, as the impact assessment for this measure highlights. Referral fees have skyrocketed from around £250 per case in 2004 to £800 in 2009. Referral fees incentivise and reward making claims, thereby inflating the cost of claims, hitting the victims of accidents and ultimately adding costs to insurance premiums for the general public.
Given all that, we have no objection to a ban on referral fees in general, although we will keep a close eye on them to check whether they are being implemented and having the effects intended by the change.
I want to pick up on a point raised by fellow Novocastrian, my noble Friend Lord Beecham when the regulations were debated in the other place last week. He raised the issue of the extension of the ban on referral fees to non-profit organisations and trade unions that are, under the legislation, treated in the same way as those commercial organisations.
He questioned whether that equivalence should exist. Lord Beecham asked Lord Newby in the other place when the Government would extend the ban to other categories of law beyond personal injury, which was, of course, the Government’s stated intention. In reply, Lord Newby said that there was no immediate intention to extend the ban. Will the Minister elaborate on that and update us on whether there are any plans to extend the ban either in the immediate future or further down the line?
I have a couple of questions. In the summary and analysis section of the impact assessment for the regulations, the Government state:
“Advertisers may gain from more business”.
What consideration have the Government given to the potential for a rise in aggressive advertising or cold or nuisance calling as a result of that? We have probably all experienced approaches on payment protection insurance claims and are aware of the nuisance that those can cause. Will the Minister therefore reassure us that, as a result of the ban, which may result in more aggressive advertising by companies that still want to win this business, those who suffer at the hands of cold callers will not suffer additional calls?
In the enforcement, implementation and wider impact section of the impact assessment, next to the question,
“What is the annual change in enforcement cost”,
the Government have put the answer: “tbc”. I assume that the assessment has now been undertaken, so will the Minister update us on what that likely cost will be?
The Minister may also be aware of recent reports that indicate that the new system is not working, with a significant number of businesses involved in the personal injury market acting in breach of the referral fee ban since its introduction on 1 April. That has been confirmed by the chief executive of the Solicitors Regulation Authority. I would be grateful if the Minister commented on those concerns, given that they are being raised only two and a half months since the ban came into force. Presumably, the Government want it to be properly enforced to assist the regulations’ aims, which we support.
9.7 am
Mike Crockart (Edinburgh West) (LD): It is a pleasure to serve under your chairmanship, Dr McCrea.
I did not intend to speak this morning, but the mention of nuisance calls stirred me into action. When I leave here this morning, I will go to the Public Bill Office to pick up my Communications (Unsolicited Telephone Calls and Texts) Bill, which I will present to Parliament later today.
I welcome the proposals in the regulations because I hope that they will form part of the fight against the growth in nuisance calls, unsolicited calls and texts. In removing the referral fees, I hope that we will remove one of the areas that is generating the leads into claims management companies.
Ofcom issued a report earlier this month that showed that 85% of us receive two nuisance calls a month and 12% of us are unlucky enough to receive eight nuisance calls a month. Of those unsolicited calls, 50% are generated from personal injury claims. I hope that this measure will be a massive step forward in choking off some of the supply chain for the leads that generate those calls.
We are making progress; just yesterday, the Information Commissioner’s Office issued a £100,000 fine to We Claim U Gain, one of the companies featured in the BBC 3 programme “The Call Centre”, that is involved in exactly the type of activity that we are hoping to stop through my Bill.
The measure is a small step. I hope that the Government will accept the extra small steps that I will propose later today, but I welcome the regulation for everything it does to try to choke off the nuisance of unsolicited calls and texts.
9.9 am
Sajid Javid: First, I thank the hon. Member for Newcastle upon Tyne North for her broad support of the regulations. I also thank my hon. Friend the Member for Edinburgh West for his supportive comments. I would also like to add my appreciation for the work done by the right hon. Member for Blackburn; the hon. Lady was right to raise his input into this issue and the passion that he has shown in articulating it.
The LASPO Act introduced rules against the payment and receipt of referral fees for legal services in relation to personal injury. The regulations set out the Treasury’s response regarding insurance companies and insurance intermediaries.
The hon. Member for Newcastle upon Tyne North asked why non-profit-making organisations such as charities, NGOs and particularly trade unions are subject to the ban. That query was raised in the other place. The Government have decided that it is not in the public interest for the payment and receipt of referral fees to be allowed in personal injury cases. That means that, whether the recipient is a trade union, charity or any other type of third party, the use of referral fees is prohibited. It is right to include all third-party organisations and there is no need for an exemption.
The hon. Lady asked about any plans that might exist for the extension of the ban on referral fees. We are primarily concerned with personal injury claims as the main source of claims inflation, which is why we are taking immediate action in that area. The 2012 Act includes the power to extend the prohibition to other types of claims and other legal services, should the need arise. I can repeat the assurance of my noble Friend Lord Newby that the Government currently have no plans to extend the ban in any way.
The hon. Lady asked about claims management companies and whether the regulations could lead to a rise in what we might call nuisance calls, as they look for business. Claims management companies will no longer be able to accept referral fees in relation to personal injury claims, and it is our assessment that that should result in a decrease in call activity. We will of course keep that under review and see whether any further action needs to be taken if things do not quite transpire in that way.
Finally, the hon. Lady asked about the costs to the FCA of the regulations and how such costs will be covered. The enforcement and supervision of the regulations will fall under the FCA’s business-as-usual activities supervision unit, and we do not envisage that requiring any additional resource.
Catherine McKinnell: I thank the Minister for his answers. I want to put on the record one point in relation to his comment about claims management companies. I appreciate that the regulations will result in a disincentive for such companies to make cold calls because they will not receive referral fees. However, I suggest that the companies that process the claims will
still gain financially from doing so and may find other ways of targeting and contacting potential claimants. They may rearrange themselves into other company structures so that they can still profit while not falling foul of the referral fee arrangements. The regulations may not, therefore, result in a reduction in the nuisance contacts that the public are currently blighted by.I wanted to put on the record that the measures may not be a panacea for the problem, but I take on board the comments made by the hon. Member for Edinburgh West and note the Bill that he is taking through Parliament. Hopefully, collaboratively, we can begin to provide support to the public, who I fear will continue to be targeted despite some of the changes that are being introduced.
Sajid Javid: The hon. Lady makes a good point. She is right to emphasise it, especially given her experience in the legal profession, and clearly speaks with deep knowledge on such issues. She is right to point out—if I have understood her correctly—that, despite the positive impact of the regulations and, more widely, the 2012 Act, we should keep a keen eye on this area and ensure that the stated intentions are realised. If the CMCs and others effectively work out ways around the new restrictions, we should not hesitate to take a fresh look to see whether any other action needs to be taken. I accept her point.
Catherine McKinnell: I have one additional question related to the point that I have just made. The Solicitors Regulation Authority expressed concerns in the profession that the ban, which is now in place, is already being flouted or not adhered to. Professionals are also concerned about whether the Government are taking that on board and whether they will look at how best to ensure that the regulations are properly enforced.
Sajid Javid: I can give a commitment that I will ensure that officials are looking at the issue, and that the FCA is aware of it, if it is not already, because it is an important point.
If there are no further questions, I commend the regulations to the Committee.