Legal Services Consumer Panel - Referral Arrangements: Call for Evidence
Until 2004 referral fees were prohibited under Solicitors’ Professional Rules. The Solicitors Introduction and Referral Code 1990 provided at Section 2(3):
Solicitors must not reward introducers by the payment of commission or otherwise. However, this does not prevent normal hospitality.
In March 2004, this prohibition was lifted. A Law Society paper entitled Disclosure of funding, fee sharing and referral arrangements: important notice for all practitioners confirmed that:
The Law Society’s Council has liberalised the rules concerning … payments for referrals by solicitors subject to various conditions and safeguards…. The new rules came into force in March 2004.
The amendment was as follows:
Solicitors’ Introduction and Referral Code
In Section 2(3) of the Solicitors’ Introduction and Referral Code 1990, after the words ‘Solicitors must not reward introducers by the payment of commission or otherwise’ the words ‘except as permitted by Sections 2A and 3A below’ have been added.
After Section 2 a new Section 2A has been added as follows:
Section 2A: Payments for referrals
(1) A solicitor must not make any payment to a third party in relation to the introduction of clients to the solicitor, except as permitted below.
(2) Solicitors may enter into agreements under this Section for referrals of clients with introducers who undertake in such agreements to comply with the terms of this Code.
(3) A solicitor may make a payment to a third party introducer only where immediately upon receiving the referral and before accepting instructions to act the solicitor provides the client with all relevant information concerning the referral and, in particular, the amount of any payment.
(4) The solicitor must also be satisfied that the introducer:
(a) has provided the client with all information relevant to the client concerning the referral before the referral took place and, in particular, the amount of any payment;
(b) has not acquired the client as a consequence of marketing or publicity or other activities which, if done by a solicitor, would be in breach of any of the Solicitors' Practice Rules and in particular by '‘cold calling'’; and
(c) does not, under the arrangement, influence or constrain the solicitor’s professional judgement in relation to the advice given to the client.
(5) If the solicitor has reason to believe that the introducer is breaching terms of the agreement required by this Section the solicitor must take all reasonable steps to procure that the breach is remedied. If the introducer persists in breaches the solicitor must terminate the agreement in respect of future referrals.
(6) A solicitor must not make a referral payment if at the time of the referral the solicitor intends to act for that person with the benefit of legal aid, or in any criminal proceedings.
(7) For the purpose of sub-section (1) above, a payment includes any other consideration but does not include normal hospitality, proper disbursements or normal business expenses
There is a view that the lifting of the restriction on referral fees with no appropriate safeguards drove up costs in personal injury cases. Thompsons’ view is that lifting the restriction led to a culture of excessive referral fees being charged by insurers and claims farmers. The level of referral fees sought by insurers and claims farmers not only drove down the quality of the service provided by the lawyers who took on those cases but encouraged a risk averse approach.
The concerns over referral fees was one of the issues the Final Report of Lord Justice Jackson’s Review of Civil Litigation Costs, published in January 2010, sought to address. On referral fees the Report suggested there were three options:
Whether the payment of referral fees should be banned, alternatively capped or otherwise regulated.
The Report concludes that referral fees should be banned though Jackson provided that:
If my primary recommendation is rejected, then I recommend that referral fees be capped at a modest figure, which I suggest should be £200
In deciding to ban referral fees in personal injury cases Jackson was primarily concerned with the abuses by claims farmers and BTE insurers. In setting out his reasoning he said:
4.7 On the basis of all the evidence that I have read and heard during the Costs Review, I consider that BTE insurers and claims management companies charge referral fees without adding any commensurate value to the litigation process. On the contrary, referral fees have now escalated to such a level that some solicitors cut corners in order to (a) cover the referral fee and (b) make a profit on the case. In straightforward road traffic accident (“RTA”) cases often more than half the fees paid to the solicitors are paid out in referral fees. This is to the detriment of the client, the solicitors and the public interest.
4.8 I accept that solicitors would still pay marketing costs if referral fees were banned, but those marketing costs would no longer be driven upwards by the ratcheting effect of referral fees. I see considerable force in the arguments advanced during Phase 2 that referral fees have driven up normal marketing cost.
4.11 There is also a wider point. In my view, it is offensive and wrong in principle for personal injury claimants to be treated as a commodity. BTE insurers should not be in the position of auctioning off the personal injury claims of those whom they insure. It is equally unacceptable for claims management companies to buy in personal injury claims from other referrers and then sell them on at a profit. Indeed the very language of the claims management industry characterises personal injury claims as a commodity. Strong cases ready to be pursued are described as “oven ready”.
In Thompsons’ view Jackson is absolutely right to attack the unacceptable conduct of BTE insurers and claims companies for their profiteering by the commoditisation of personal injury claims and the exploitation of injury victims. Indeed we said precisely that in July 2009 in our submissions to Jackson on referral fees and BTE:
In our experience BTE has offered nothing to the funding of PI cases. Indeed it has been responsible for a model based on excessive referral fees which we consider drives down quality and encourages risk averse behaviour.
Our understanding of the model is that it is, in effect, hollow cover. By that we mean that whilst the policyholder may have an indemnity as against the insurer, the arrangements are such that the insurer pays little or nothing out and, in fact, simply collects referral fees and other benefits from law firms in return for the cases referred.
In motor insurance the insurers for the Defendant driver will often provide BTE within the policy for passengers to pursue claims against the driver. They then sell that case to a panel law firm. The result is that the same insurer is choosing which lawyer takes on the case against itself and making a profit through the referral fee whilst doing so.
In practice motorists often have BTE cover to pursue a claim and, even if they do not, their insurer will still seek to sell the claim for a referral fee to a panel law firm as they are often the first to be notified after a crash…. Where it exists the BTE model is based on referral fees, risk averse behaviour and conflict of interest and as such we believe it should be condemned, not encouraged.
We explained why excessive referral fees drove down the quality of the legal service to the consumer:
The fixed costs distortion is compounded by the insurers’ BTE model of high referral fees. They effectively force their panel law firms to employ less experienced staff due to the loss of income to referral fees. A similar model applies to those firms paying high referral fees to claims farmers.
Again we emphasise there is a clear pattern here.
The model suits the insurers because it drives down both damages and costs whilst delivering high referral fees to them. Effectively the lawyers can’t use costs recovered to employ the right level of quality experienced staff to recover the right levels of damages, since they are passing much of their costs onto the insurers in referral fees.
The result is lower quality representation and lower damages, effectively in built under settlement. That fits a model based on computer systems – the insurers don’t employ experienced staff and neither do their opponents and they can get away with low offers
It also suits those law firms who work with the insurers who can maximise their profits by large turnover on low margins.
Against this background, the fundamental importance of union legal services and other independent law firms is clear. Unions are not for profit membership organisations. For them the objective is to deliver the best quality justice for their members. They have high expectations that their law firms will maximise damages. There is no place for undersettlement or any models based on high volume, low margins. The key for unions is quality legal representation – union firms compete on that basis.
We included claims farmers in this analysis as adopting similar practices to BTE insurers:
Indeed it is insurers themselves who are the worst culprits for charging excessive referral fees, together with the claims companies who, in our experience, are simply parasitic in the claims process. We accept cases from neither source.
In the appendix to this submission we expand on why these excessive referral fees encouraged risk averse behaviour.
Thompsons’ view is that Jackson is absolutely right to put a stop to the distortions caused by BTE insurers and claims companies. However we believe he is totally wrong to do so by a complete ban on referral fees.
JACKSON AND REFERRAL FEES
The negative impact on over 14 million consumers
The excesses of BTE insurers and claims companies would be caught by an outright ban on referral fees, but so too would many other organisations that offer genuine access to high quality legal services.
The problem arises partly from the definition of referral fees.
For many years prior to the lifting of the ban on referral fees in 2004 trade unions had, through the law firms they referred personal injury cases to on behalf of their members, provided a range of free or reduced cost legal services.
In many cases this service was extended beyond the unions’ 6.3 million members to their families too.
The legal package was not only assistance in personal injury cases and advice on employment law but included free wills and free legal helplines for non work related matters. The firms were also expected to provide training for union officers on employment law to enable them to better negotiate members’ employment claims.
Thompsons would argue that the range of legal services available to union members and their families (which were permitted before 2004 as they were not referral fees and fell within the definition of referral fees after the lifting of the ban) have an intrinsic value to consumers and to society as a whole.
Union legal services provide telephone access to high quality legal services. They do so to a section of society who demographically have some of the greatest need of legal help but do not have ready access or the means to obtain that advice.
Jackson’s blanket ban would render these arrangements unlawful. On the issue of defining referral fees the Report says:
The SRA makes the point that defining what a referral fee is requires some care, in order to catch disguised referral fees but to permit legitimate marketing. I accept this advice and have requested the SRA to assist in formulating an appropriate definition of “referral fee” and in keeping that definition under review. The Legal Services Board (the “LSB”) will also have a role in this regard. The definition which I propose, subject to review by the SRA and LSB, is “any form of payment or other consideration to a party for introducing clients to a solicitor”
Adoption of the current SRA definition would ban free wills and free legal advice and any other reduced cost service provided by a union law firm.
Unlike BTE insurers or claims companies, unions are not-for-profit bodies which exist for the benefit of their members. Their primary concern is to ensure that their members have the best quality legal advice. They actively seek to drive up the quality of legal services for their members and the democratic structure of unions means that where quality is perceived to have dropped there are measures for challenging their law firms. Unions are also prepared to take risks and pursue difficult claims.
The negative impact on charities, membership organisations and not-for-profit bodies
There are many other bodies who represent injury victims and work closely with law firms to provide extensive services to those victims who would be affected by a blanket ban on referral fees. These include charities, membership organisations and other not for profit organisations - asbestos support groups, serious injury charities, head injury charities and cycling clubs.
Like unions, these bodies exist to benefit their members/constituents, not to make a profit. They drive up the quality of the legal advice to their members by working only with firms that satisfy them as to quality and experience and commitment to difficult and ground breaking cases.
In recognition of the referral of personal injury cases law firms often assist victims’ groups with free advice on state benefits, legal advice surgeries, training and the sponsorship of events. Jackson’s recommendation would make this unlawful.
We favour an outcome which puts an end to the unacceptable abuses by BTE insurers and claims companies but which supports the access to high quality justice offered by membership organisations, charities and not-for-profit bodies.
REFERRAL FEES PROPOSAL
We would propose that referral fees retain their current definition and be permitted only where they satisfy all three of the following criteria:
1. That they are reasonable in amount;
2. That they are provided wholly or mainly in services rather than as direct financial payments; and
3. The beneficiaries are only membership organisations, charities and other not-for-profit bodies.
What is a reasonable amount is a matter for discussion. It should certainly be less than the excessive referral fees paid to BTE insurers and claims companies. Jackson indicates that often these amount to more than half of the legal fees in the case of road traffic claims.
A model may be that the value of services provided and any associated modest sponsorship should not exceed an amount which is informed by reasonable marketing costs. This reflects the fact that any form of referral fee is in effect a type of marketing.
A law firm can attract legal work in many ways. Whether they advertise direct in newspapers or on radio and TV there will be a cost. If they distribute leaflets or produce literature there is a cost. Web marketing involves a great deal of initial and ongoing investment.
All marketing options require expenditure which can be calculated as a cost per case. It follows logically that a law firm may choose to offer services or modest sponsorship in return for the referral of legal work. But this only makes good business sense where it is a cost neutral option.
Below we provide some evidence of our marketing costs.
We have worked with our union clients to market their legal services in order to drive up the referrals of personal injury cases from those unions. Details of two recent not untypical initiatives are set out below. We have had other campaigns where the cost per case has been higher and others where it has been lower.
We launched a PI pilot scheme in one region of England. The campaign had two main communication elements: one to union representatives and one to members.
The union representatives were sent direct mail, a poster to put up in the workplace, a leaflet explaining the role a rep could play in assisting members with claims, an example of a claim form and a letter setting out the purpose of each piece of material and the overall purpose of the communication campaign.
In addition the members were sent a leaflet explaining the benefits of the union scheme, the costs that might arise from an injury, a form with a freepost envelope and a letter explaining the context.
In the region a number of events took place and Thompsons took the opportunity to present the campaign at those events and to distribute leaflets and posters.
The cost of the campaign was £52,000 and the distribution was to 100,000 members.
Comments on the material from survey participants included:
“Thought the leaflet was useful and understood everything on it.”
“I found all of the info extremely useful. It is particularly good as it explains family members can also claim.”
“You have done an excellent job on the letters and leaflet - no improvements needed.”
“All information was clear and helpful - I understood it all.”
The campaign generated 135 cases in a three month period by which time it had run its course. This amounts to £385 per claim.
We launched a new advertising campaign including posters for the workplace, information in union journals and direct mail leaflets to members.
The total cost was £57,000.
In the first month the campaign generated 84 cases. Our experience is that campaigns of this type generate approximately 50% of the cases in the first month so, since this particular campaign is ongoing, the estimated number of cases is 168 which would amount to a cost of £339 per claim.
In this Response we have sought to cover as many of points (a) to (g) of the Key Areas of Investigation as we can.
We endorse Jackson’s condemnation of the excessive referral fees charged by claims farmers and BTE insurers.
We agree that they have driven down the quality of legal services for consumers.
We consider they also result in a risk averse approach which means that consumers with meritorious but high risk claims are turned away and where a claim is pursued it will often be undersettled due again to risk aversion when weighing up formal offers which carry costs consequences.
Jackson fails completely to consider other arrangements which would now be categorised as referral fees due to the wider SRA definition which he adopts.
His proposal for a complete ban on the basis of that definition goes too far and would damage access to justice for consumers through membership organisations, victims’ charities, and other not-for-profit bodies.
The complete ban on referral fees would make it unlawful for law firms who receive referrals from not for profit organisations to provide free wills, free legal helplines, advice surgeries, training for frontline staff assisting consumers, benefits advice etc.
There is no mention of this impact in the Jackson Report and we can only conclude that this was not considered and these would be unintended consequences.
We propose that referral fees retain their current definition and be permitted only where they satisfy all three of the following criteria:
1. That they are reasonable in amount;
2. That they are provided wholly or mainly in services rather than direct financial payments; and
3. The beneficiaries are only membership organisations, charities and other not-for-profit bodies.
We would suggest that the value of services provided under our proposed model and any associated modest sponsorship should not exceed an amount which is informed by reasonable marketing costs.
That is unlikely to be an absolute figure but to inform the process, from our recent experience the cost of marketing to union members was £339 and £385 per case respectively.
APPENDIX 1: EXCESSIVE REFERRAL FEES AND RISK AVERSE BEHAVIOUR
Under the current CFA funding arrangements prevalent in PI claims, there are fixed success fees designed to deliver access to justice. The aim is to ensure that it is financially sustainable and viable to pursue a meritorious case contested by a powerful insurance company.
The level of success fees were agreed by an industry wide mediation process overseen by the Civil Justice Council (CJC) relying upon extensive research for the CJC by a respected economist, Paul Fenn. Both claimants and defendants were represented in the mediation process which proceeded on the basis that the outcome must be cost neutral and was ultimately implemented through the Civil Procedure Rules.
In simple terms, if a case has 50% prospects of success the solicitor pursuing the case on a CFA would have to be paid double in the cases won to pay for the costs they would not get in the cases they lost. So if the costs in two such cases are, for example, £5,000 in each case, the solicitor would be paid £10,000 in the successful case and nothing in the other case meaning that the total recovered in the 2 cases is equal to the costs incurred in those cases, ie £10,000.
Fixed success fees only delivered costs neutrality over a large number of cases. It was agreed, for example, that the fixed success fee in a road traffic accident case would be 12.5% (100% if the case was fought to trial). The same figure applied to high risk and low risk cases and was designed to even out over a volume of cases. Excessive referral fees distort this neutrality as the solicitor would be under pressure to cherry pick the strong cases and reject the high risk but meritorious cases, ie the 50/50 or 60/40 cases. This is because:
1 The solicitor is having to give away part of their costs in the referral fee. That means the firm is squeezed and must make economies. They may employ less experienced staff (affecting quality) and/or not pursue high risk cases where the success fee is fixed at 12.5% but the risk is much greater (encouraging risk averse behaviour).
2 Independent law firms and those acting for the trade unions secure their cases through their reputation for fighting hard and taking on winning difficult claims. Firms on BTE and claims company panels secure their cases by bidding to pay the highest referral fee. If you are going to pay a high referral fee there is an inbuilt incentive to be risk averse and no reputational incentive to take risks.