Kennedys' Civil Justice Group (CJG) this week led a delegation to Parliament to meet with the Right Honourable Jack Straw MP, to discuss efforts to promote Mr Straws Private Member’s Bill (the Motor Insurance Regulation Bill, introduced in September 2011) which calls for a ban on referral fees. The issue is currently being discussed by Parliamentarians as part of the wider package of civil litigation reforms proposed by Lord Justice Jackson in January 2010. During the summer of 2011 the Government indicated its willingness to ban referral fees and on 1 November the Ministry of Justice (MOJ) tabled a number of amendments to the Legal Aid, Sentencing and Punishment of Offenders Bill (LASPO) to address the issue. In response to this development and the need to campaign further on this issue, Jack Straw MP has said “I was delighted that the Government recently decided to change their mind and ban referral fees. Further measures are required, however, if costs are to be brought down for law abiding motorists. Achieving these changes will require a concerted effort from all parties and I welcome the debate about how the industry can move forward”.
As outlined in our e-update of 28 October, whilst the insertion of a ban into LASPO is to be welcomed, there is still much work to be done to ensure that the MOJ arrives at the right outcome. Our major concern at this stage is that the proposed amendments to LASPO as tabled by the Government will create potential loopholes. This article considers the main provisions of the new clauses and highlights key areas of concern.
Rules against referral fees
NC18 (1): regulated person
It is assumed that solicitors, barristers, claims management companies (CMCs) and insurers will fall within the definition of a regulated person due to mention of the regulating bodies (Law Society, FSA, Bar Council and Claims Management Regulator) in the second part of the Amendment. If correct, this is to be welcomed.
NC18 (2): provision of services
A regulated person cannot arrange for another person to provide services to the client and either pay or be paid to do so. This refers to others providing “services” while providing legal services in the course of prescribed legal business.
The definition of “prescribed legal services” is linked through to the definition of legal activity in the Legal Services Act 2007 and includes any reserved legal activity as well as the provision of legal advice and assistance in the resolution of a dispute.
The wording would allow the Lord Chancellor to make regulations banning referral fees for other types of work. Indeed the House of Commons Select Committee has called for a ban beyond personal injury claims, in its report on the theft of personal data.
However, a potential loophole exists here (perhaps in the short-term only) that a claim is passed to a person or entity which is not regulated and who pays for that referral themselves. This loophole is specifically linked to the current definition of “consideration” for provision of services (considered below).
NC18 (4): prescribed legal business
Prescribed legal business covers all injury and death claims - EL, PL and Motor claims. This is a common sense approach.
However, is the definition of “legal services” broad enough? Would it, for example, capture the payment for disingenuous medico-legal reports confirming a whiplash injury?
NC18 (8): consideration
Straight payment and/or referral arrangements appear to be ruled out by the definition of “consideration”.
However, careful thought is required to ensure full protection, including the capture of membership fees capable of manipulation.
For example, there is a danger that law firms may decide to pay a significant “membership fee” to be on a panel for non-injury services which are not prescribed legal business, e.g. employment law, human rights, conveyancing, wills and probate or general services, and receive in return (“for free”) the claimant injury cases.
Would such an arrangement be captured by the “consideration” definition of payment?
NC19 (1) – (5): sanctions
It appears to be a situation of every regulating body being required to pass their own rules. Guidance and consistency is required as to what sanction a breach should involve - any sanction imposed must be greater than the benefit that is being obtained in return for the referral fee payment(s).
One assumes that the Bar Council, Financial Services Authority (FSA) and Law Society will have larger regulatory ‘teeth’ than the Claims Management Regulator (CMR). This inherently creates a risk of inconsistency of enforcement powers.
Given the CMR does not favour a ban of referral fees, it is questionable that the CMR will impose meaningful sanctions and/or ones that reflect those imposed by the ABI (and so FSA), Law Society and Bar Council, who favour a ban.
In addition, the criminal offence having been removed, confirmation is required as to who will police repairers, credit hire companies etc.
NC19 (8): consideration for provision of services
A payment will not be considered to be a referral fee if it is (and if it is said to be by a Regulating Body) either: Consideration for the provision of services, or for another reason, and not as a referral fee.
This is a significant exception. We fear that a law firm could well seek to pay to “receive” services in return for the receipt of cases. Examples of such services could include training, risk management assistance, commercial expertise, and business consultancy from those referring the prescribed business.
Alternatively, the firm could make significant payments towards a referrer's marketing costs, or, following the implementation of the Legal Services Act 2007, provide funds for the running of the new jointly owned business.
It is, therefore, important for the Government to go behind the surface of the arrangement to look at the substance. Clarity is also required on the limit of “paid for services”. It would perhaps be sensible to set the limit by reference to the usual commercial rate.
Other avoidance techniques
A CMC could still send out a large number of referrals seeking to argue they were for assistance other than related to injury claims, which subsequently become injury claims. For example, within 24 hours of a road traffic accident, a CMC could refer cases on for handling claims related to damages for vehicles - before they are actually told there is an injury claim involved - but knowing that an injury claim will almost certainly materialise given the level of damage to the vehicle.
The Government must be alive to such misbehaviors.
Reduction of MoJ Portal fixed costs
In order to develop a complete package of reform, the ban must be complimented by a reduction of fixed fees and legal costs generally.
During the LASPO Bill report stage in the House of Commons, Justice Minister Jonathan Djanogly MP was prompted to offer the government’s opinion around fixed recoverable fees. Djanogly indicated his support of reducing fixed fees in conjunction with a ban. He gave the commitment that the government is “looking at this” and that MOJ officials plan to consult on appropriate changes to the level of recoverable costs.
Djanogly added that the desired outcomes would not require primary legislation. Instead, a reduction could be implemented through changes to the Civil Procedure Rules.
Kennedys intends to keep a watchful eye to ensure that the Government fulfills its commitment.
For Straw, the need to redefine whiplash is central to the problem he is committed to resolve.
Whilst the genuine claimant should be compensated, if the ban on whiplash claims falls away, another way to address the problem is to use the motor Portal (currently under consultation). For example, the Portal could be used as a vehicle to require medical reports to be sourced from an independent vetted panel of experts rather than using MROs. This would involve applying an enhanced Portal fee to cover the cost of the medical report while removing any vested interests.
Alternatively, the level of compensation for whiplash injury could be brought within the remit of the small claims court – raising the threshold of PI from £1,000 to £5,000 would instantly reduce the number of claims.
The House of Lords is due to give consideration to the Commons’ amendments after the LASPO Bill has received its Second Reading in the Lords at the end of November.
It is clear that there is broad political support for reform on referral fees. However, to help ensure that the Government reaches the right outcome, we will be working closely with members of Parliament and officials at the MOJ when LASPO goes to the House of Lords to ensure that policymakers understand the need for a comprehensive reform package which addresses any unintended consequences.