In preparation for chairing a debate on Referral Fees – One Year on, taking place at UCL on 6th April (book here), I have been doing some digging into views on referral fees. The dominant view appears to be they are, “alive and well” if “slightly adjusted”. Alternative Business Structures, Joint Ventures as well as schemes where information is provided by the client not the referrer are some ways round the ban.
That’s not to say the ban has had no effect. It may have impacted more on marginal players, less able to see sensible ways round the ban itself. Perhaps the ban is a subterranean competence test: if you can’t see a way round it, you’re not much of a lawyer, could be the refrain. In the incompetence or daft camp, might fall firms who may have told the SRA they have ceased relations with CMCs when they haven’t. Similarly, the ban may have weeded out some CMCs (as some data suggests) or led some CMCs to deregister on the (flawed) basis they can carry on their business without making “referrals” and so without needing to be regulated by the Claims Management Regulator. The consensus also appears to be that ban, but more likely the general squeeze on personal injury costs, has driven down the level of such fees.
What do the work arounds look like? Epoq provides one such service (LegalGo). As legalfutures describes it, CMCs distribute LegalGo as a free service to claimants which they sign clients up for online. LegalGo offers a general legal helpline, a selection of online legal document drafting services and referrals for other legal services. The plan is serviced and administered by Epoq. An e-mail is then sent to the claimant enabling them to accept the terms of the plan and contact the law firm directly. “The plan is organised so any request for help with a PI claim comes direct from the claimant; the law firm then pays the CMC for telling the client about the law firm.”
The assumption is that the referral fee ban is not activated because it is the client (not the referrer) which contacts the firm to pass on their information. One question is whether this arrangement is compliant with the ban. As described in the Legalfutures story, there may be an argument as to who is passing on the information needed to provide the services. If the CMC, through LegalGo, are organising the information which is then passed on by the client (or the client authorises access to it through an email to a firm), then it seems moot to me who is ‘providing information’ necessary to make an offer of relevant services. In reality the provision of the information is something of a joint endeavour. I may well be wrong to raise doubts; and readers should note Andrew Hopper QC has indicated his firm opinion that the arrangement is not a banned referral fee arrangement.
In more substantial terms, if one of the concerns about referral fees is a lack of informed consent by the client to a referral fee, one might argue that this approach offers some improvement. The client’s role in passing the information on to a claimant solicitor at least shows a greater level of consent through participation to the referral than would have been the case before the ban. It’s a rather modest improvement though, and does not – in itself – suggest the client is better advised. One would hope and imagine a company of Epoq’s repute would be doing a decent job of informing the client within the constraints of an online system. Substantial responsibility may fall to the CMC, who are more visible and have more reputational need to ensure the client is comfortable with the arrangement. As Richard Cohen, of Epoq puts it, “It also negates the need for law firms and CMCs to seek new regulatory structures to get around the ban and so allows them to focus on what they do best.”
Another model is the First Notification of Loss service. I am told, one approach is for a legal expenses insurer to outsource to a law firm its initial claims handling. The claim-line number for first notification of loss is operated by the law firm at its own expense. It may also pay a fee per policy sold. On behalf of the insurer it will deal with all claims issues, passing the insured to preferred repairers, credit hirers, etc. One can see here how the client is not just a client, but also a source of ancillary revenue streams through commissions for these referrals. Firm paying for the privilege of providing a call-centre service can capture no-fault PI claims. Again, it is thought to be LASPO compliant because any information comes directly from the client.
There is some worry that Joint Ventures and ABSs worsen not improve the position pre-ban. If the referral fee ban has hastened the control of all aspects of a claim by an insurer through an ABS; has this institutionalised a conflict of interest or made the process more efficient? Insurers involved in ABSs have to get through SRA licensing processes, and may be regulated by the PRA and FCA. They thus have to satisfy those regulators that they have systems to manage conflicts.
One worry is that the personal injury bit of the case is not very profitable – if it is profitable at all – and so the incentive to run that to the maximum benefit of the client is minimal. The structural desire on the insurance company at group level is to minimise costs on claims: does that mean not just efficient processing of the claim itself, but also minimising the level of compensation? Systems might provide some protection against that but simply (and legitimately) driving efficiency hard may drive down value for customers. Dissatisfied customers might result, but insurance companies work hard to manage client expectations through service. Conversely, and relatedly, bringing a whole bundle of services and functions together may lead to greater speed and quality of outcome for the client. SO we have two opposed but plausible hypotheses: which is correct is an empirical question.
On the other hand, the dominant feeling that has been expressed to me is that the end of recoverability; and changes to fixed fees – whilst they may be squeezing down on referral fees – are also squeezing down on the viability of firms. We have already seen significant collapses of personal injury firms. How many more will we see? Economic precariousness brings with it ethical risk. So does the newly discovered complexity of charging clients up to 25% of part of their damages. Are firms succeeding in making these deductions transparent and intelligible? Early scrutiny of post-referral fee arrangements by the SRA appears to have led to a view that referral fees are only part of the problem.
…in setting up arrangements in a way that does not breach LASPO, firms are failing to consider their wider duties to their clients and others, and in doing so may be breaching the Principles or failing to achieve the Outcomes. Examples include:
agreeing with an introducer to deduct money from clients’ damages;
inappropriate outsourcing of work to introducers;
referrals to other service providers which are not in the best interests of clients;
failure to properly advise clients about the costs and how their claim should be funded; and
lack of transparency about the arrangement.
As far as I can tell no one really knows how these different approaches to PI claims impact on clients or outcomes. Referral arrangements, joint ventures and ABSs have the potential to extend access to justice (by ensuring claimants get to good service providers) but they also have the potential to lead to real detriment (the deductions and charges claimants pay; the invisible and largely unknown impact of any conflicts on settlement levels and timing) as well the potential for incentivising fraud – be that through poor quality claims or adding on costs – such as car hire – which do not need to be incurred (for which someone in the claim chain gets a nice commission). ABSs and joint ventures may lead to economies of scale and scope; they may prompt efficiencies; and they may lead to the claimant being placed second third or fourth in the pecking order of provider concerns if the revenue streams are largely generated elsewhere. Claimant solicitors can produce examples of under-settled claims, which paint a worrying picture, but really we need a better, partly quantitative picture of how things are working. Ordinary law firms are not however exempt from similar concerns: they too have conflicts of interest to contend with. The regulators seem to satisfy themselves with systems not outcomes. Perhaps they need to get a bit more focused and start looking more forensically at what the system delivers for clients and for policy holders? Or perhaps, if things haven’t changed so much, then referral fees weren’t really that much of an issue after all?
Banning Referral Fees – One Year On: Is the personal injury field now more ethical? Tuesday 8th April 2014, 6pm, UCL Faculty of Laws, Bentham House, Endsleigh Gardens, London WC1H 0EG Book here
Speakers: John Spencer, Spencers Solicitors, Member of the Civil Justice Council, APIL; Stephen Mayson, Consultant, leading commentator on the legal profession; Andrew Hopper QC, leading authority on professional regulation; and, Kathryn Mortimer, Managing Director, DAS Law
Chaired by Professor Richard Moorhead, Director CELS, UCL Laws