The government’s proposed figures for fixed costs for personal injury cases in the portal and the fast track should not have come as a surprise. Whatever the truth may be, they are determined to stamp out what they view as a “compensation culture”. They also believe that middle-men are making excessive profits from the trade in personal injury claims.

This is a two-pronged assault. The first prong is statutory with a ban on paying or receiving referral fees for personal injury claims from April 2013. The second prong is economic by reducing recoverable costs by the amount they believe is being paid in referral fees. The obvious aim is to drive out practices which are designed to avoid the statutory ban.

Evidence about the amounts paid in referral fees came from a very good source. Liability insurers are ironically the largest single recipients of referral fees. They reported that some law firms paid them around £800 for cases which would currently generate £1,200 in fees. This would leave only £400 to pay for the law firm’s work. So, in setting the new portal fee at £500 (for road traffic cases with up to £10,000 in damages), the government have increased the current fee by inflation and then reduced it by £800. A similar calculation has reduced Professor Fenn’s fast track costs matrix (for cases under £25,000 damages which fall out of the portal).

Lord Justice Jackson had suggested the reduction should be £600 as law firms, like any other business, should have some allowance within the fee for the costs of case acquisition through legitimate marketing. It is possible that the government will slightly increase the proposed fees after consultation to allow for this. But law firms that do not pay referral fees report that current marketing costs (TV, radio, internet etc) are similar to referral fees. Largely this is because there is significant competition to acquire personal injury work at the current fee rates. Whether marketing costs stay so high in the brave new world of reduced fixed fees in the portal and fast track remains to be seen. But common sense suggests that few firms will be willing to pay £800 in marketing costs to acquire a case for which the total recoverable fee is only £500.

The proposed £500 fee does not amount to much more than three hours of a junior qualified solicitor’s time at the guideline hourly rate set by the court for civil litigation. Unqualified paralegals would be expected to complete the work in well under five hours. Even in the simplest case the work involves taking instructions, carrying out regulatory checks, calculating financial losses, completing a detailed claim notification form, instructing a medical expert, considering and discussing the medical report with the client, preparing a settlement pack, agreeing the offer to be made with the client and negotiating a settlement with insurers.

The new fixed cost regime will cover all claims of all types for damages up to £25,000. For example, the fixed recoverable fee for a road traffic accident claim where liability is admitted and the damages are between £10,000 and £25,000 will be just £800. For a pensioner or a child with no loss of earnings this will include serious fractures requiring medical reports over several years before the prognosis is clear. Insurers are also unlikely to readily admit claims by pedestrians, cyclists and bus passengers who will have to prove liability. This will require the solicitor to undertake the necessary work necessary to achieve this.

Some large law firms are already running straightforward whiplash cases on a volume, factory basis having “north-shored” the work away from expensive locations to cheaper parts of the UK. Such firms are handling tens of thousands of cases from all over the country. Rumours abound that some of these larger operators are now contemplating off-shoring the legal process. This would be to countries where labour is much cheaper so as to preserve their profit margins following the fee cuts.

Smaller, local law firms will not be able to deliver the same economies of scale. Such law firms will have to ensure that any fees they charge to the client (over and above the fixed recoverable costs) are sufficient to provide a quality service and to obtain proper compensation for the client’s injuries. The government has also decided to implement Lord Justice Jackson’s proposals to end recoverability of success fees for the risk that the case will fail. Firms will therefore also have assess the true risk in each case so that the firm receives a proper economic return for taking it. These reforms are a fundamental change in the philosophy underpinning compensation for accident victims. The “polluter pays” regime established by the last Labour government whereby the wrongdoer pays for the whole of the cost of his wrongdoing has now been swept away.

After April 2013 some claimants who have suffered a minor injury which has resolved within weeks may be happy to avail themselves of the conveyor-belt, call centre justice of the factory firms, even if their compensation might be a bit lower as a result. But where liability is difficult to establish, or where the injury is more serious, or where the client simply wants an individualised approach, then government policy dictates that after April 2013 they are likely to have to pay something out of their compensation for this.