Referral fees ban helps to clean up murky area of law

Personal Injury analysis

New figures show a dramatic fall in the number of claims management companies (CMC) dealing with personal injury claims following the ban on referral fees. The fees used to be paid between no-win, no-fee lawyers, claims firms and others for profitable claims. Kerry Underwood, senior partner at Underwoods Solicitors explains the reduction.

Original News

The number of CMCs registered to handle personal injury claims has fallen from 2,435 in March 2012 to 1,700 in June 2013. The sharp decline follows changes to the law around compensation claims passed in 2012 and brought into effect in April 2013. These included a ban on the ‘referral fees’ which used to be paid between no-win, no-fee lawyers, claims firms and others for profitable claims.

Can firms assume CMCs left in the market are not breaching the PI referral ban?

No, firms can certainly not assume that. I have seen many proposals by CMCs, who remain licensed, which clearly breach the provisions of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, ss 56–60 (LASPO 2012) and solicitors needs to be very careful indeed that any scheme complies with LASPO 2012.

In many instances it is wishful thinking on the part of the law firm that the proposed arrangement is lawful.

Firms tend to concentrate on LASPO 2012, s 56(1) which deals with the passing of data, and many firms and CMCs seem to think that in the absence of data being passed from the CMC to the law firm there is no referral.

That is quite simply wrong. Section 56(2) is a free standing subsection and states:

‘A regulated person is also in breach of this s if in providing legal services in the course of prescribed legal business the regulated person:

(a) arranges for another person to provide services to the client, and

(b) is paid or has been paid for making the arrangement.’

Thus making an arrangement for another person to provide services to the client and paying or being paid for that arrangement also breaches LASPO 2012, even if no data is passed.

What sorts of arrangements do not breach the ban?

Very few, in my view. Joint marketing schemes between solicitors where payment is unrelated to the number of cases is within the law and genuine website hosting activities, again where the payment made to the hoster is unrelated to the number of hits, also do not breach the ban.

However, even in this type of case the onus is on the solicitor to show that the payment is not for a referral. LASPO 2012, s 57(8) specifically allows the Solicitors Regulation Authority to make rules to provide for the payment to be treated as a referral fee unless the regulated person shows that the payment was made:

• as consideration of the provision of services, or

• for another reason

• and not as a referral fee

Bringing the first and second questions together it should be very hard for a CMC, receiving money from a firm of solicitors in a personal injury matter, to show that they are not breaching the ban. Why else would a firm of solicitors be dealing with a CMC?

Is further consolidation of the CMC market expected?

Yes, I would expect the number of CMCs dealing with personal injury work to fall sharply as the ban is enforced, and as solicitors realise that they are far better off branding their own firm and not relying on CMCs. There is evidence already that those solicitors firms that were dependent upon paying referral fees are themselves exiting the market by selling or merging and that the firms that are doing well are, unsurprisingly, those firms that never paid referral fees, or where paid for business was only a small part of their work.

What will be the knock on effect for solicitors?

Clearly the ban on referral fees will greatly benefit solicitors as it removes a significant cost from the market and should help re-establish solicitors as the first port of call. This should also help clean up what has been a murky area of the law in some instances.

There is already evidence that firms active and local in the community, which see every client and offer high levels of service, are seeing a sharp increase in personal injury work.

Under the old procedure it was not just the fact that work was paid for but the dissociation between the solicitor and client. Referral fee solicitor firms often never saw their clients and saw no long- term relationship with the client as they never intended to act for them in any other matter.

The strict enforcement of the referral fee ban can only be good news for solicitors.

Interviewed by Evelyn Reid

Kerry Underwood is the senior partner at Underwoods, one of the leading employment and personal injury firms and writes the blog Kerry Underwood.

This article was first published a News Analysis piece in LexisPSL Personal InjuryIf you are not a subscriber, please click here to find out more and to access a free trial. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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