The MOJ’s draft wording seeking to ban referral fees has been published by Justice Secretary, Ken Clarke. The insertion into the Legal Aid, Sentencing and Punishment of Offenders (LASPO) Bill of rules against referral fees is to be welcomed and appears at first glance to be favourable.

However, even with limited time to consider the full implications of the proposed wording of the ban, we have recognised a number of potential loopholes. Our concern is that as currently drafted, the MOJ run the risk of failing to address the mischief of increasing claims numbers and claims costs that have lead to higher insurance premiums for policyholders.

Scope

The proposed rules seek to ensure that no lawyer, insurer or claims management company can trade in personal injury or fatal claims in return for, or as a result of paying, a referral fee or as a result of entering into a referral arrangement.

Further, the proposed rules prevent such parties from arranging for any other person to provide any service for the receipt or payment of a fee that falls within the overall ambit of dealing with an injury claim.

Nevertheless, the MOJ Portal fees to be paid to claimant lawyers remain unchanged. Referral fees are still allowed in other areas of business and there is a loophole if permitted by a relevant regulatory body.

There also appear to be some obvious ways of seeking to avoid the proposed ban.

Regulated Person

The proposed wording suggests that solicitors, barristers, claims management companies and insurers will be regulated and prevented from referring personal injury cases in return for payment, or making payment for the receipt of such work. Payment includes any form of “consideration” in return for receiving such work.

The regulating bodies named within the Bill are The Law Society, Bar Council, Claims Management Regulator and FSA. The Bill provides that the regulators must police and monitor for breaches of the rules.

Provision of services (within the main body of the personal injury action).

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” whilst in the course of providing legal services in the course of personal injury cases.

A loophole!

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 and one that could allow referral arrangements through the ‘back door’ if permitted by a regulating body. We fear that, for example, a law firm could well seek to pay to “receive” services in return for the receipt of cases.

Services which might be used as “payment” include training, risk management assistance, commercial expertise and business consultancy from those referring the prescribed business. The firm could also make significant payments towards a referrer’s marketing costs.

Such a firm could, therefore, receive “for free” the claimant injury cases, thus exploiting the current loophole.

We believe it is important for the Government to clarify the limit of “paid for services”. It would perhaps be sensible for the limit to be set along lines that are proportionate to the service being paid for, for example, by reference to the usual commercial rate.

Sanctions

It appears that every regulating body will be required to pass its own rules and sanctions. We believe that guidance is required to ensure consistency as to what sanction a breach should involve; and that any sanction imposed by a regulating body must be greater than the benefit that is being obtained as a result of the referral fee payment(s).

There is an obligation for the regulator to police and monitor for breaches of the new rules. However, given the Claims Management Regulator (CMR) does not favour a ban of referral fees, there seems little incentive for the CMR to impose meaningful sanctions and/or ones that will reflect those imposed by the FSA , Law Society and Bar Council, who broadly favour a ban.

Impact upon a Solicitor’s retainer

Payment of the referral fee does not render a solicitor's retainer void. It is, therefore, important that any sanction imposed by the Law Society is greater than the benefit that would be obtained by the solicitor as a result of the receipt of profit costs generated by paying a referral fee.

Other possible avoidance techniques

There are indeed others. We will cover these in a detailed article in Liability Brief on 11 November 2011.

Reduction of MOJ Portal fixed costs

The proposed reduction of fixed costs has not been adopted within the Bill. We maintain that a reduction is necessary in tandem with an effective ban of referral fees.

Claimant lawyers will still receive the current level of MOJ Portal costs, but not have to pay a referral fee to receive a case as they may have previously done. In turn, if claimant lawyers stand to be better off for each case they run, claims frequency is unlikely to fall. Conversely, those insurers who had benefitted from referral fees will be expected to accept a reduction in their income but with no corresponding reduction in the claims frequency or claims costs.

That is contrary to the mischief that was originally intended to be addressed - lower claims numbers, lower claims costs and therefore lower insurance premiums.

We will be publishing a detailed article in the next edition of Liability Brief on 11 November 2011.

Kennedys will continue to engage with our clients and interested individuals to canvass their views, with the aim of achieving policymaker engagement. This should allow us to influence policy outcomes by highlighting the issues raised by the Government’s civil justice review.