118.In this Chapter, we look at the potential impact of raising the small claims limit on the availability of before the event insurance, on the operation of claims management companies and on the PI legal sector. In addition, we consider the issues of cold calling and paid McKenzie friends.
119.Before the event (BTE) insurance allows the insured to purchase a low-price legal expenses insurance product prior to any legal claim arising. Although the scope of coverage varies, BTE policies typically give access to a free legal helpline and, where litigation is indicated, referral to a solicitor on the insurer’s panel without cost to the insured person. The insurance may also cover some or all of the insured’s potential costs liabilities in legal proceedings. Many BTE policies are sold as “add-ons” to motor or household insurance. Echoing the evidence from James Dalton of the ABI to our predecessor Committee, Jason Tripp from Coplus, a provider of BTE motor legal expenses insurance, explained the distinction between the BTE insurance market and claims management companies (CMCs):
The primary market is characterised by before-the-event legal expenses insurance. These are personal injury claims that arise from accidents when first reported by the driver to their motor insurer. That is quite a different market from what I like to call the secondary market, which is the after-the-event market, where personal injury claims are procured by CMCs marketing for PI claims months, often years, after the date of the accident.
120.Mr Tripp thought that the Government’s PI reforms were intended to tackle characteristics of the secondary market, where the risks of exaggerated and fraudulent claims are more prevalent. In his view, the “one-size-fits-all” approach taken by the reforms would lead to “an unintended detrimental effect on the primary legal expenses market,” even though the primary market “is much better behaved.” He described BTE insurance as “the primary method of access to legal services for motorists in the UK and, more importantly, access to legal representation”.
121.The written evidence from Coplus estimated that BTE insurance provides access to legal services free at the point of need for some 10 million motorists. The level of premiums—typically in the region of £25 to £30 per year—is achievable because the current costs rules for PI litigation mean that legal costs (including fees payable to the claimant’s solicitor) are paid by the losing party in successful cases; this limits the claim costs for BTE insurers to the costs of litigation that is unsuccessful. When PI claims arise, BTE providers refer their policyholders to solicitors on their panel who have been selected for their expertise and have agreed to work on a tariff of fees in exchange for volume of work. Coplus explained what it thought would be the impact of moving such a high proportion of PI claims to the SCT.
This would remove solicitors’ right to recover legal costs in successful cases in all but the highest value and most serious cases. This would transform 95% of successful claims from zero cost (paid by the losing party) into cost centres. Solicitors would have to either seek payment of their costs from BTE [motor legal expenses insurance] providers or step away from the motor accident PI market.
122.Coplus suggested in its written evidence that—assuming BTE motor legal expenses insurance providers had sufficient notice—they would be faced with a number of options in response to raising the small claims limit: (a) excluding PI claims from BTE policies or (b) restricting them by value or type to keep costs down; (c) including advice on PI claims but leaving customers to handle them alone in the Small Claims track; (d) finding other organisations that can handle PI claims at a lower cost; or (e) maintaining a similar quality of service, increasing premiums accordingly. In Coplus’ view, options (a) to (c) would not operate to the benefit of the customer. Option (d) could deliver a solution but “it is plain that an unregulated service provider is unlikely to operate to the same standards as a panel solicitor”. As for the final option, Coplus thought that the higher premiums would erode the Government’s forecast savings to motorists arising from the PI reforms. In his oral evidence, Jason Tripp reflected on the potential consequences for motorists of increasing BTE premiums:
[BTE insurers] could fund small claims work with legal representation, which would make the product more expensive. That again leads to a stark choice for the consumer at the point of renewal of their legal expenses insurance. Do they purchase the cover at much higher cost or do they look for a product with lower coverage or lower value because that is less expensive? Neither of those choices is good for the consumer. On the one hand, you have customers paying more for access to legal representation when they need it, or they are left without legal representation at the point of claim.
123.Evidence from other witnesses supported this view about the impact of raising the small claims limit on the BTE insurance market. The Motor Accident Solicitors Society feared that the market could take “many years” to put together a new product that was financially viable. Carpenters, a motor injury law firm working in partnership with insurers and brokers, thought that the BTE model would be disrupted, and that this would affect customers without injuries who are seeking reimbursement for financial losses relating to motor accidents, such as repair costs and travel expenses; Carpenters thought that these claims represent over 30% of motor insurance claims, and explained that for panel solicitors the cost of taking them on is currently subsidised by PI claims. Both Carpenters and Coyne Learmonth Solicitors drew attention to the disbursements relating to a PI case, such as court fees, medical reports and other expert reports—which, under a BTE policy, would be initially funded by the solicitor taking on the case.
124.Other witnesses were less certain of the significance of BTE cover, pointing out that there was low consumer awareness of these products and that take-up of BTE as an add-on to other insurance cover was declining, which they thought was partly because of aggregator websites making consumers’ decisions more price sensitive in a highly sensitive market. Some thought that the market might well adapt, but that it was too soon to know. In November 2018, an expert Working Group of the Civil Justice Council published a report on BTE legal expenses insurance, which considered that the proposed increases to the small claims limit may increase the need for BTE, as lawyers would not be willing to take PI small claims under a conditional fee agreement (CFA). The Working Group recognised that a rise in the small claims limit might increase BTE premiums, as BTE insurers would no longer be able recover costs in claims under the new small claims limit; they thought that this impact “may however be counterbalanced, at least to some extent, by a reduction in claim numbers following the whiplash reforms.” However, the Working Group did not consider it possible to anticipate precisely how these factors would play out until the reforms were introduced and the market had had a chance to react to them.
125.The Impact Assessment (IA) that accompanied the Ministry of Justice consultation paper in November 2016 recognised that BTE providers would face higher costs as legal fees would no longer be recoverable from defendant insurers. These costs would be passed onto BTE premium holders in the form of higher premiums. The IA estimated that 70% of RTA claimants currently have BTE insurance and that this proportion would remain the same after the reforms:
Future take up is uncertain; on the one hand, demand may go up because claimants will have to pay the legal fees for any claims they make, but on the other hand premiums could go up (to cover the increased costs to BTE insurers) which may make demand go down. It is therefore reasonable to assume take up will remain the same.
Based on evidence that it received, the MoJ’s final stage Impact Assessment assumed that 50% of claimants, rather than 70% as previously assumed, currently have BTE-funded representation. Once again an assumption was made that this proportion would remain the same after the reforms are introduced. The IA acknowledges that BTE may become more expensive under the proposals, but “we do not believe it would be prohibitively so, given our understanding of the profitable nature of the product and insurers’ view that the product will likely adapt.”
126.We conclude that the Government has under-estimated both the role of BTE insurance in securing legal representation for PI claimants, and the impact of raising the small claims limit on BTE providers’ current business model, with potentially adverse consequences for access to justice.
127.Several witnesses suggested that, if BTE insurance were to become too costly, claimants would turn to claims management companies (CMCs) for assistance in bringing PI claims. Some drew an analogy with CMCs’ history of involvement in Payment Protection Insurance [PPI] claims. , Keoghs thought that CMCs would have a greater potential market to target, pointing out that “history teaches us that in a very simple PPI claims process, more than 85% of claimants used a CMC” and Carpenters thought that CMCs would be one of the main beneficiaries of raising the small claims limit. Similar views were expressed by Jason Tripp from Coplus, who told us:
If we take some learning from the experience in PPI claims, it has always been the case that individuals can bring their own claims, yet they continue to use CMCs. I think that will be the likely outcome were you to remove legal assistance from the majority of personal injury claims. They will turn to CMCs because it is just easier.
The written evidence from Coplus explained that, after the PI reforms, CMCs’ income stream would be switched from the legal costs generated by solicitors in successful cases (that is, costs paid by the defendant), to deductions from customers’ compensation. Steve Mitchell from Usdaw thought that CMCs were “inherently flawed” because, unlike solicitors, they are not required to represent the best interests of their clients. FOIL referred to CMCs’ “dexterity in the market”, allowing them to find new streams of income as others dried up; and RSA Insurance pointed out that a CMC can take any agreed percentage of a client’s damages; “it is not uncommon to see CMCs charge 35% to 40% of sums recovered in PPI claims.” Based on existing concerns about the conduct of CMCs, the National Accident Helpline, a provider of personal injury advice and support, speculated that raising the small claims limit could create a risk that “unscrupulous CMCs would seek to exploit the absence of legal advice from lawyers, increasing the number of litigants in person, rogue marketing practices and spurious claims.” The organisation expanded on the type of tactics that it thought “rogue” CMCs might use:
…deluging the system with high volumes of claims, abandoning more difficult cases and exploiting maximum revenue from straightforward claims. It will become uneconomical for CMCs and lawyers alike to pursue more difficult claims (e.g. where liability is denied or where the injury or losses are not straightforward), within the small claims track. Such adverse consequences are contrary to the interests of injured people, insurers and the legal system.
The British Insurance Brokers’ Association (BIBA) went further, suggesting that too often CMCs had been “enablers of fraud” whilst adding little to the claims process. BIBA also drew attention to reports that some CMCs had “evaded punishment” by closing the company down, only to open a “phoenix” company shortly afterwards.
128.On the other hand, witnesses accepted that some CMCs operated to better standards. Nigel Teasdale from FOIL told us that he “[did] not think we should necessarily tar every CMC with the same brush”, a point accepted by Jason Tripp, who said:
There are many fine, large, nationally operating CMCs that provide legal services under the current rules to people without before-the-event legal expenses insurance. The problems are confined to cold calling and the promotion and exaggeration of certain claims.
When we asked the Minister, Lord Keen of Elie QC, whether it might not be preferable to support the BTE market rather than CMCs, he responded:
I would not make that binary judgment. Good CMCs look after their customers, and if the claims management companies move into this market it could be beneficial. Of course, we are extremely concerned about the behaviour of some rogue CMCs, and we are increasing regulation in that area. But there is no reason to suppose that substituting CMCs for BTE insurance is a bad thing.
129.As has been noted above, the Financial Guidance and Claims Act will transfer responsibility for regulating CMCs to the Financial Conduct Authority (FCA), which is expected to pro-actively re-authorise every CMC and impose a “fit and proper persons” test on owners. Section 28 of the Act gives power to the FCA to make rules to provide “an appropriate degree of protection against excessive charges” by CMCs, and Section 29 provides for an interim cap of 20% on fees that CMCs can charge claimants for their services in relation to PPI claims in the period before transfer of regulation to the FCA. Many witnesses supported the introduction of caps on CMC charges for PI claims. Lord Keen explained:
We want to see how the changes with regard to road traffic injury cases and personal injury cases bed in before we decide whether or not to encourage the idea of such a limit being introduced. The Financial Conduct Authority would be in a position to do that [ … ]
130.We welcome the reforms to the regulation of CMCs in the Financial Guidance and Claims Act, which will mitigate the risk of any unscrupulous activity on the part of CMCs if the small claims limit is changed. Evidence to our inquiry suggests that a cap on the proportion of compensation that CMCs can levy from a claimant in a PI claims is strongly desirable. We recommend that the Financial Conduct Authority impose a cap of no less than 20% and that this should be done as soon as possible after it assumes its new role as regulator of claims management services.
131.Another area of concern is cold calling by CMCs. Nuisance calls in general are covered by the Privacy and Electronic Communications Regulations 2003 which are enforced by the Information Commissioner’s Office. The Telephone Preference Service operates a central service enabling individuals to register their objection to receiving direct marketing calls. A Parliamentary Question in 2015 to the Secretary of State for Culture, Media and Sport about the scope of the Telephone Preference Service elicited the following answer:
[The Regulations] already prevent international nuisance marketing calls being made on behalf of UK companies. Callers are legally required to ensure they do not call a number that is registered with the Telephone Preference Service (TPS). UK consumers are also protected if they have previously notified the caller that they do not wish to receive such calls. Callers can be subject to fines of up to £500,000 for breaching the regulations. International marketing calls on behalf of non-UK companies are outside of the UK’s jurisdiction.
One of the “Frequently Asked Questions” (FAQs) on the TPS website concerning overseas calls goes further, explaining that the TPS makes its file available to overseas based companies under licence, so they know whom not to telephone, but many overseas companies who telephone the UK on their own account from overseas do so to avoid legal and self-regulatory restrictions.
132.The problem of cold calling by CMCs was identified by witnesses, including the National Accident Helpline and Steve Mitchell from Usdaw, who feared that the reforms would lead to “an epidemic” of this practice. Concerns were also raised in evidence to our predecessor Committee, including by Neil Sugarman, then President of the Association of Personal Injury Lawyers. Although Lord Keen confirmed that a ban on cold calling was included in the Financial Guidance and Claims Bill, he explained that the Government did not have a complete answer to this problem:
Actually, effectively stopping cold calling is an immensely complex process, because cold calling nowadays is carried out by unregulated entities from outwith the United Kingdom [ … ] They then spoof their telephone numbers—as it is termed—so that it is impossible to trace the origins of the call. Therefore, it is a problem that we are looking at and constantly monitoring. We are legislating to try to control it.
133.We conclude that the Government’s current package of reforms creates a risk of increasing cold calling by, or on behalf of, CMCs; we welcome the restrictions on cold calling in the Financial Guidance and Claims Act, but believe they do not go far enough and that an outright ban should be introduced. In the meantime, we recommend that the Government monitor the effectiveness of the proposed restrictions, particularly on calls from overseas, and that technical remedies are urgently explored to tackle any loopholes that might be exploited by overseas operators to circumvent the restrictions; we ask that the Government report to us on progress with this within a year of the proposed restrictions being implemented.
134.A McKenzie friend is someone who assists a litigant in person (LIP) in a court of law in England and Wales; the person does not need to be legally qualified. This assistance may be in the form of moral support, or—with the court’s permission—may involve conducting the litigation or acting as an advocate on the LIP’s behalf, either with or without payment. At the court’s discretion, a McKenzie Friend may be granted permission to address the court to help the LIP present their case; it has become increasingly common for such permission to be granted. A noted increase in the number of ‘professional McKenzie friends’, who provide their services to LIPs on a fee-paid basis, was the focus of a consultation conducted by the Lord Chief Justice in 2016, which attracted a large number of responses. The judiciary’s most recent update on this project, in September 2017, explained that the Judicial Executive Board had decided to establish a further judicial working group to review the original proposals in the consultation paper in the light of consultation responses received.
135.Witnesses from the insurance and claimant sectors expressed fears that an increased role for CMCs in relation to smaller PI claims might lead to an increase in the use of paid McKenzie friends in the PI sector. The Association of British Insurers summarised its own response to the Lord Chief Justice’s 2016 consultation:
…we set out our concerns about the potential for McKenzie Friends to receive payments for services to consumers despite the fact that they are unregulated, lack any requirement for indemnity insurance or even training, and have no applicable professional standards for the protection of consumers. McKenzie Friends should also be subject either to the same fee caps as lawyers providing similar services to consumers, or they should be prevented from charging for their services.
The Motor Accident Solicitors Society questioned “how an unqualified individual can provide the same standard of advice and support [ … ] without having any legal qualification, professional insurance or significant experience of handling claims.” The Society was also aware of anecdotal evidence that McKenzie friends were being hired on a self-employed basis by CMCs ahead of the proposed reforms. When we put these concerns to Lord Keen, he responded:
It is an interesting point. Of course, McKenzie friends can play an important role in helping and supporting litigants in person. The judiciary are currently looking at this, as I understand it, and the judiciary can control the level of engagement that McKenzie friends have with the court [ … ] There is room for abuse—let’s be clear. Effectively you can have, as you say, a paid McKenzie friend who is, to all intents and purposes, operating as a claims manager without regulation.
136.We conclude that, as a result of changing the small claims limit for PI claims, there is a real risk of paid McKenzie friends being used by CMCs to sidestep the regulatory requirements that apply to advocacy provided by members of the legal professions. We recommend that the senior judiciary seek to conclude its examination of this issue as soon as possible.
137.The MoJ’s consultation stage Impact Assessment did not consider the impact of the package of PI reforms on claimant lawyers within its Net Present Value (NPV) analysis—something that attracted comment from the Regulatory Policy Committee, who considered that this should be justified. The MoJ’s 2018 Impact Assessment recognised that claimant lawyers are among the groups likely to experience changes in demand as a result of the proposed reforms and it estimated that they could experience a total loss in legal fee income of around £80 million per annum. However, these estimates are not included in the NPV calculations because an assumption is made “that those affected will replace the lost work with other legal work of an equivalent economic value.” This assumption is not justified, however.
138.Access to Justice, a campaign group, drew our attention to a report that it had commissioned from the consultancy Capital Economics, which concluded that the PI legal sector provides an estimated 28,000 full time jobs, with the greatest concentration in the North West of England; an additional 40,000 jobs are supported by the spending of the PI legal sector on its suppliers and the spending of its employees on goods and services. Data from the survey indicated that 46% of PI legal firms derive more than 60% of their income from PI cases with a value of less than £5,000. According to the report, the loss of PI activity will push profit margins in many legal firms to unsustainable levels, with 70% of jobs related to PI cases at high risk of being lost. Evidence to our predecessor’s inquiry from a number of solicitors’ firms raised similar concerns about the risk to jobs in the PI legal sector arising from the reforms, particularly in the North West. The law firm Canter Levin and Berg Ltd observed:
The notion that law firms will find other areas in which to practice is nonsensical as while everyone can retrain, the market for other types of legal advice will not expand simply because the personal injury market has been culled.
In addition, Minster Law told us that a growing number of large and smaller claimant law firms was already going out of business.
139.We consider it regrettable that, at the consultation stage of these proposals, the Ministry of Justice concluded that it was not relevant to estimate the potentially substantial impact on the PI legal sector, particularly in the North West. It is also unclear to us why the Ministry’s final stage Impact Assessment has assumed that the sector will be able to replace PI legal work with work of equivalent value. While our inquiry did not focus on this issue, we nonetheless draw the Ministry’s attention to the impact of the reforms on the PI legal sector and the potential for this sector to replace PI work that it loses, both of which we consider to be important questions.
194 See paragraph 27
200 Including Carpenters ; Thompsons Solicitors ; Horwich Cohen Coghlan Solicitors ; Steve Mitchell, Usdaw 
205 This was a finding of the CJC report - see footnote 208 below
206 Access to Justice , Minister Law , True Solicitors LLP . The introduction of the FCA’s ban on BTE insurance as an opt-out purchase was seen as an additional factor.
207 Including Shirley Denyer, FOIL ; DWF Law ; DAC Beachcroft ; National Accident Helpline .
208 . Civil Justice Council, November 2017. Page 150
209 Ministry of Justice, November 2016. Paragraphs 2.112 and 2.113
210 Ibid, page 40
211 . Ministry of Justice, March 2018. Paragraph 5.47
212 Ibid, paragraph 5.46`
213 Including National Accident Helpline ; Forum of Insurance Lawyers 
214 Payment protection insurance (PPI) is a product that enables consumers to ensure repayment of credit if the borrower dies, becomes ill or disabled, loses a job, or faces other adverse circumstances. As many as 64 million PPI policies have been sold in the UK, mostly between 1990 and 2010. The Financial Conduct Authority has found that many PPI policies were mis-sold, for example because consumers did not have the product explained to them or were falsely told that it was compulsory.
220 . See also
226 Including Aviva ; DAC Beachcroft ; Keoghs ; RSA Insurance Group ; Zurich Insurance Plc 
229 “Does registration with the TPS stop calls from overseas?”
234 . Lord Chief Justice of England and Wales, February 2016.
236 Including Motor Accident Solicitors’ Society ; DWF Solicitors ; Forum of Insurance Lawyers .
239 . NPV is the difference between the present value of a stream of costs and a stream of benefits.
240 Paragraph 5.26
241 . Capital Economics, January 2017.
242 Including McHale & Co Solicitors ; Thorneycroft Solicitors ; Nicola Dickinson ; Keith Teare, solicitor .
Published: 17 May 2018