Justice Secretary Ken Clarke has this week (29 March 2011) announced radical plans to shake up the “no win no fee” basis of funding legal claims.

This type of funding arrangement is typically seen in personal injury and medical negligence cases and much of the publicity has centred on the impact in those areas (by way of example it has been widely reported that in 2008/9 the NHS paid out £312 million in damages but £456 million in costs).

However, Mr Clarke’s reforms will come as welcome news to many banks, insurers and other financial institutions too. They have been on the receiving end of many thousands of claims from customers concerning consumer credit and the alleged mis-selling of financial products. Most recently this has involved payment protection insurance (“PPI”) policies, where the claims for legal costs often dwarf, sometimes many times over, the loss actually suffered by the customer (and the compensation eventually paid). That is because of the routine application of “success fees” by claimant solicitors, acting under conditional fee arrangements (“CFAs”) that allow them to increase their costs claim by 100% should their client win at trial (or the claim be subject to earlier settlement).

Mr Clarke is effectively proposing to implement some of Lord Jackson’s proposals on costs reform contained in his report last year. The Justice Secretary proposes to strike at the heart of the “compensation culture” by abolishing the recoverability by claimants of after the event (“ATE”) insurance policy premiums (insuring claimants against the risk that they might lose the case and have to pay their opponents costs) and success fees from losing defendants. He will then increase damages awards by 10% in order to assist claimants in paying their legal fees; the proportion of any damages that can be taken by lawyers will be capped at 25%.

Success fees were introduced in order to improve access to justice for individuals, in the wake of the cuts to Legal Aid in civil claims, who would otherwise have been unable to pay for litigation. However, the system arguably laid the tracks for a gravy train which has since been hurtling through the civil litigation landscape at breakneck speed. The system has been viewed by some as a lawyers’ licence to routinely double fees. Others say it has led to a culture of conveyer belt litigation, where claims are ATE backed, routinely subject to a 100% success fee, and in our experience, issued without any genuine assessment of legal merit; the claimant solicitors also have a clear vested financial interest in the outcome of every claim.

Whilst the system may have increased access to justice for certain claimants, it has simultaneously reduced it for defendants who must frequently consider costs and funding arrangements above the merits of the case. Claimants are able to effectively litigate without any risk and such a lack of control has created abuses in the system. Some defendants who face claims with such funding arrangements in place could face the dilemma of being inclined to settle, simply to buy off the costs risk at an early stage, even where they have the strongest of defences. This is especially so where the ATE policy applies steep hikes in premium at key tombstone dates in the litigation.

Buried away in the publicity concerning changes to “no win no fee” was the announcement by Mr Clarke that he also intends to consult on the overhaul of handling civil cases, something that has not been looked at since the reforms spearheaded by Lord Woolf in the late 1990s. As part of the process the Justice Secretary will be looking at raising the small claims limit to £15,000 (from £5,000), automatic referral of small claims to mediation rather than the Court and raising the minimum value of a case that could be taken before the High Court to £100,000.

The full impact of the proposed reforms outlined by Mr Clarke is uncertain at the present time as there are still unknown details to be released. But the decision is likely to be broadly welcomed by business and public bodies who live under the constant threat of the “compensation culture”.