Government to ban referral fees in personal injury cases
The government has confirmed plans to introduce a ban on the payment of referral fees in personal injury cases.
The prohibition will be introduced through the Legal Aid, Sentencing and Punishment of Offenders Bill. However, the Ministry of Justice has admitted that “there is no universally recognised definition of ‘referral fees’”.
The MoJ argued that the current arrangements had “led to high costs, encouraged a compensation culture and led to the growth of an industry which pursues claimants for profit”.
It said that insurance companies passed on the costs they incur through increased compensation claims directly onto motorists and those with other insurance policies, “unnecessarily forcing up the cost of living”.
Justice Minister Jonathan Djanogly said: “The ‘no-win, no-fee’ system is pushing us into a compensation culture in which middle men make a tidy profit which the rest of us end up paying for through higher insurance premiums and higher prices.
“Referral fees are one symptom of the compensation culture problem and too much money sloshing through the system. People are being encouraged to sue, at no risk to themselves, leaving schools, business and individuals living in fear of being dragged to the courts for simply going about daily life.”
Djanogly also confirmed the government’s commitment to implementing the proposals contained in the MoJ’s November 2010 consultation, which would “end the bizarre situation in which people have no stake in the legal costs their cases bring”.
Under these proposals, which came out of the independent review carried out by Lord Justice Jackson, losing defendants will no longer have to pay success fees to claimant lawyers. Instead the claimant will have to pay the success fee, which will be capped.
“The intended result is a fairer split of costs between parties, and lower legal costs overall which means lower costs to pass on to customers or taxpayers,” the Ministry claimed.
In May this year, the Legal Services Board concluded that “the purely regulatory case” for a ban on referral fees had not been made out. “This is because sufficient evidence of consumer detriment, which would have been needed to merit a ban, has not been found,” it said in a report. (The Board did not look at the public policy grounds for a prohibition)
The LSB pointed out that the legal services market was on the threshold of substantial structural change, and that this could lessen law firms’ dependence on referral fees and decrease the importance of claims management companies (CMCs). It also suggested that law firms would move more into claims management, and CMCs would seek to become alternative business structures.
The super-regulator also warned that a ban could create “perverse incentives” that might lead to more harmful behaviour, such as the payment of ‘under the counter’ inducement fees.
The LSB endorsed an approach that focused on strengthening transparency obligations, “rather than seeking a simple ban”. It also said it planned to undertake a review of approved regulators’ approaches to regulation of referral fees, arrangements and fee sharing.
Peter Lodder QC, the Chairman of the Bar, said: “We are delighted that the Government has seen sense and is taking steps to ban all referral fees in personal injury cases. For a long time, and repeatedly, the Bar has called for referral fees to be outlawed, not just in personal injury cases, but in all cases, privately or publicly funded. They are bribes and add an unnecessary cost to litigation. They have no place in a fair and open justice system.
“We are also pleased to see the Government is acting on this issue in the public interest, which the Legal Services Board palpably failed to do when presented with the opportunity to earlier this year.”
The Association of British Insurers, which has campaigned vociferously against referral fees, also welcomed the MoJ announcement. Otto Thoresen, its Director General, said: “Referral fees add no value and encourage spurious and exaggerated personal injury claims.
“It is important that the ban must be watertight and apply across the board. Banning referral fees is an important first step in tackling our dysfunctional compensation system, and needs to be accompanied by a reduction in legal costs and action to tackle whiplash if honest customers are to benefit from these reforms.”
