Cash on tap

Referral fees are like fireworks to liability insurers. To mention them is to light the blue touchpaper. Now they have some company. Last week, the Solicitors’ Regulation Authority (SRA) revealed that one third of its members fail to tell their clients when they have paid to be handed their cases. In light of this damning evidence, the SRA will reconsider the rules in December – and theoretically could ban the fees.

But given their massive unpopularity in so many quarters, why do referral fees remain a growing phenomenon? Simple. There are lots of people making lots of money.

“Referral fees are invidious, totally unnecessary, drive unhealthy behaviour and bring no benefit at all to the customer, the insurer or to members of the public,” says Roy Hebburn, divisional claims manager at Allianz.

“The referral fee creates claims and inflates claims. It brings an income to some people but it is the insuring public who pay.

“The world and his wife are looking to sell on claims. They are just selling on a lead – anything they can come by. There is a feeding frenzy around accidents and it is of no benefit to the unfortunate person who is involved in the accident. Referral fees don’t bring any benefit to the individual whose accident generates the fee. They bring an income to someone, but that person does not add value anywhere in the process.”

Dominic Clayden, director of claims at Norwich Union, insists that while referral fees are legal, they are out of all proportion. “They are way in excess of the work,” he says.

“You hear of referral fees of £500 to £700 for lawyers paying intermediaries. Fundamentally, the legal costs are too high and that allows disproportionate referral fees to be charged.”

The credit hire business also stacks up a few bob and these companies often make deals with brokers. Barry Bromley is secretary of the National Association of Credit Hire Operators, one of the two trade bodies in the sector. He estimates insurers pay credit hire firms £1bn a year, with the average transaction costing £1,200 to £1,400.

“That makes it on to the radar screens of the main boards of insurance companies,” says Bromley. Take away the costs of a hire car and, from the remaining profit, it is easily enough to pay a substantial referral fee.”

Hebburn says referral fees could be costing as much as 10% of every motor premium.

Bromley blames insurers. “Look at motor insurance TV ads. They all say they can cut premiums by £140 – that is tantamount to admitting they are overcharging. They say nothing about service standards or claims handling. Even today, those service standards are appalling,” he says.

“Insurers will take your money to insure whatever car you choose to drive but, if you have an accident, the replacement they will supply you with is a 1.2-litre Corsa that costs about £5 a day. They are a law unto themselves.

“There’s no point in telling a guy booked on a family camping holiday in his estate car that he can only have a Ford Ka.

“If somebody has an eight-seater car, he or she has to go to a credit hire company to get one, so it’s quite right that insurers should pay,” he says.

What’s more, Bromley believes it is hardly surprising people want to make money by referring claims. Take garages. “Insurers have screwed garages into the ground for repair costs so they have to make money somehow,” he says.

Purely personal lines brokers are also feeling the pinch as premiums, and with them commissions, tumble. Some are looking to make that money back.

But Allianz’s Hebburn repeats the point that these fees make money without adding any value. “Brokers are intelligent people. They get commission selling insurance, but some business models have changed. They take control of the claim and they supplement their income with referral fees. But do they add anything for the customer?” he says.

He also questions whether some people involved will slow down the process in order to make bigger referral fees, actually making the situation worse for clients.

“As an insurer you need early notification to manage claims. That way you can get a vehicle repaired or replaced, you can get injured people into rehab and you provide a replacement vehicle in the mean time. If there is a delay you can’t start doing any of that,” he says.

“If a hire car that ought to have been out for a week runs to two weeks because the insurer doesn’t get to know about it, it costs more. The hire company wants to keep that car out for as long as it can.”

The conclusion is unsettling. The hire company makes more money and can pay higher referral fees for late-notified claims. With referral fees, there could be a financial incentive to notify insurers of claims that are late.

But insurers might be at it too. Bromley says insurers often take referral fees from lawyers when they pass on claims.

“You never hear an insurer say they are paying ‘X million’ in referral fees. They are talking with forked tongues,” he says.

Clayden of Norwich Union (NU)?admits that his company does make money from referral fees. “At a bulk level we do receive money from our lawyers,” he says.

He adds, however, that NU has outlined the figure to the government as part of its drive to convince ministers to ban the fees. The figures demonstrate that because NU pays more in referral fees than it receives, the industry would be better off without them.

Hebburn says: “Allianz does have a valid business model and it does refer claims to lawyers and this is paid for.”

Phil Bird, Groupama’s new claims director, has moved from an underwriting role.

He agrees insurers are to blame. “We have brought these fees on ourselves. We gave notification of claims to the brokers because our service standards were simply not good enough.

“It is the same with replacement cars. We left a gap for other organisations to fill because we haven’t provided what the customer needs,” he says.

Graeme Trudgill of Biba echoes that view. “Referral fees came up because customers were not getting service from insurers. Customers could get a proper courtesy car from a credit hire firm that they could not get from their insurer.

“It was right for brokers to help them get that level of service. We had a call this week from a consumer with a Volvo estate being offered a standard car as a replacement. Nothing has changed.”

Hebburn goes so far as to suggest that policies may need to be rewritten and service standards changed so that insurers provide customers an equivalent car as part of their own policy and, in doing so, control the price.

“Insurers have to improve capture, improve their service and change their terms,” he says. “We also need to consider making the provision of a hire car standard.”

Bird agrees. “It is one alternative, but you still have to get to the client faster to cut out the credit hire firm.”

NU’s Clayden concentrates on the legal fees – and again, lawyers and brokers often have fee-sharing deals.

“If the legal costs come down, the referral fees will come down,” he says. That will require either the government or judges to rule that the fees lawyers are charging for these cases are too high. There is an ongoing government review.

A number of initiatives are aiming to tackle referral fees. But they are unlikely to be outlawed, though some still hope for a change of heart by the government. There are industry-wide initiatives to agree protocols and prices, there are bilateral agreements and insurers are talking about notifying each other of claims.

“I was hopeful the 2007 consultation would drive out referral fees,” says Allianz’s Hebburn. He remains convinced they can be reduced or cut out, and suggests some direct motor insurers are declaring that the non-insurance element of their balance sheets and accounts is now hugely significant.

“They make more money out of referral fees than they do out of their core business, which is insurance,” he says. “Look at what happened to the banking industry when it stopped concentrating on its core business.”

Tom Jones, managing director of Thompsons, a trade union personal injury law firm, is equally scathing about referral fees. His firm does work for one union on the basis of a fixed referral fee, but it is not Thompson’s preferred model. Instead, it provides unions with employment law advice, criminal law services and member benefits, such as conveyancing and free legal advice. Otherwise it provides senior lawyers for half the commercial rate.

He suggests law firms could offer legal helplines for insurers instead of paying them referral fees as that would enable insurers to keep down their legal-expense premiums, which are subsidised by receiving referral fees.

“I understand that one arm of insurers doesn’t like referral fees but I equally know that another arm of the industry lives off them,” says Jones.

He dislikes referral fees but doesn’t believe they will be abolished. He says codes of practice are worthless without policing. “There are still a lot of spivs out there doing deals, picking up cases and selling them on. Who is regulating that? No one.

“Companies have to register and promise to abide by a code of conduct but nobody is saying you must behave like this and pay only then,” he says.

“The problem is nobody will stop until they are sure everyone else has stopped and I think it will be dressed up in other ways. It is not a simple process to deal with. Can the world go back to the way it was? I doubt it.”

For those solicitors who win work through referral fees, it is difficult to understand why insurers get so worked up about it. Keith Turner, senior partner at Northampton-based Turner Coulston Solicitors, says: “No client minds at all if we have to pay a fee for getting work. If we didn’t pay the £500 referral, we’d have to spend £500 on advertising. And the client doesn’t mind because it’s made perfectly clear that it doesn’t come out of his damages. It comes entirely from our fees.”

John Spencer, the chairman of the Motor Accident Solicitors Society), agrees, although with a little more reluctance. “It is impossible to ignore that they exist and that they represent a key element in the personal injury market at present,” he says.

The Solicitors’ Regulation Authority itself has compared referral fees to a genie that has escaped from the bottle and cannot be squeezed back in.

Although it could ban the fees – as the Law Society did when it was the profession’s regulator – it would severely damage many firms by doing so, possibly even putting some in jeopardy. It is more likely to increase transparency requirements and police them more effectively. But for the insurance industry, this is one problem that isn’t going away.