Legal Services Board Study on Referral Fees

The Legal Services Board has now published the conclusions of its economic study on the impact of referral fees in the legal sector in terms of a costs benefit analysis and also some policy options. This is by no means the end of the road as further information and evidence will be published in due course and furthermore the consumer panel of the LSB is also working on a parallel submission.

The personal injury sector

Some insurers may be surprised and even disappointed by the conclusions that have been drawn. These can be summarised as follows:-

• Referral fees are an important element in terms of lawyers gaining access to claims management companies and insurer panels.
• Lawyers who pay more in referral fees tend to receive more work.
• Evidence suggests a significant increase in the level of referral fees between 2004 and 2010. The increase is estimated at 320%.
• No evidence was discovered to relate the increase in referral fees to a similar increase in the cost of legal services particularly due to the impact of no win no fee agreements.
• There is no evidence that referral fees are to the detriment of the consumer or the quality of legal services.
• An increased propensity to claim is likely to have caused higher insurance prices albeit in some instances this will be offset, at least in part by referral fee income received by those insurers.
• The report concludes that the introduction of reforms in terms of referral fees is unlikely to bring any benefits.

The increase in claim volumes

The report quotes some interesting statistics from the Department of Transport:-

• The number of road accidents over the past 10 years has reduced.
• The number of injuries resulting from motor accidents has increased by over 50%.
• There is a direct relationship between the increase in claim numbers and the removal of the ban on referral fees in 2004.
• Other factors which are stated as influential are:-The decision to make additional liabilities recoverable post 2000; The introduction of the fixed recoverable costs scheme.
• The conclusion is that referral fees have certainly facilitated an increase in the number of claims being made and may have encouraged people who otherwise would not have made a claim to do so.
• Interestingly there is no evidence of a similar trend within the employers’ liability sector.

Legal services and price sensitivity

Unsurprisingly the report concludes that price is not an issue for consumers when decided which legal firm to use for the purpose of a personal injury claim. Whilst this is unusual the conclusion is that the primary reason is the prevalence of no win no fee agreements.

Customers are more inclined to choose a lawyer based upon marketing material or a recommendation than price.

Many insurers may be disappointed that there is no mention within the report of the concept that the mere existence of referral fees have had an impact on the level at which fixed costs are set. Certainly negotiations around the fees agreed for the new MOJ process involved a discussion about acquisition costs.

Quality of service

The conclusion was that referral fees have had no impact and certainly no detrimental effect on the quality of legal services provided within this sector.

Interestingly, only 14 complaints have been received by the Legal Complaints Service in relation to referral fees in 10 years. If anything this illustrates the lack of interest that the consumer has in terms of issues such as commission paid.

This should also be put into some context in that the Solicitors Regulatory Authority require copious disclosure to claimants in terms of any type of commission or referral fee that is made by or to the solicitor relating to the particular personal injury case. Indeed in terms of policy options, the report concludes that no further information should be given to consumers over and above the current requirements. The report notes that clients very rarely respond to the information that they receive, the obvious inference that can be drawn from this is that they are either disinterested or have not even read it.

Policy options

A variety of options were considered for example:-

• Banning pure referral fees.
• Banning all arrangements similar to referral fees.
• Introducing a cap on referral fees.

Unsurprisingly, having already made a finding that there is no evidence that referral fees are causing detriment to the consumer and furthermore that any ban on referral fees was likely to be ineffective and virtually impossible to police this was not considered to be a viable option.

Lord Justice Jackson suggested introducing a cap on referral fees and this is considered but the researchers concluded that the rules were likely to be circumvented by other arrangements that would “make up the difference” and furthermore that a cap could in fact distort competition which was not necessarily in the consumer interest.

Concluding remarks

The report itself appears to have been written very much from the consumer perspective as opposed to that of the wider public interest. This is quite an important distinction as arguably the consumer of legal services is in a very good position within the personal injury sector due to the advent of no win no fin agreements and the recoverability of additional liabilities. If anything access to justice has never been better.

However, it is arguable that the interest of the wider public interest is not served by the increased propensity to claim and the inevitable increase in insurance premiums.

As mentioned above the consumer panel of the LSB is likely to report in the next few months. It is hard to imagine them reaching any different conclusions if they too come from the consumer perspective. As such the only conclusion that can reasonably be drawn from this is that the well used phrase “the genie is out of the bottle” is very much applicable.

Anthony Hughes,
Chief Executive