Collision course

As the drive towards legal reform accelerates, the thorny issue of referral fees continues to prick holes in plans to clamp down on escalating costs. Claims management companies (CMCs) in particular have been held responsible by insurers and many parts of the legal sector for setting this spiral in motion.

The CMC sector has developed rapidly over the past decade in the wake of the abolition of legal aid for personal injury claims. According to the claims management regulator, which sits within the Ministry of Justice (MoJ), the number of businesses in the CMC market grew by 62% last year alone, rising from 1,778 to 2,885.

Despite coming under MoJ oversight in 2006, however, this sector has continued to be plagued by accusations of false and aggressive advertising. Since April 2007, 100 companies have had their authorisation cancelled by the MoJ.

During the annual Claims Standards Council (CSC) conference in July, Lord Justice Jackson infuriated the sector by revealing that the majority of his sources for his preliminary report on civil litigation reform believed CMCs had failed to add value to the claims process. In his review, he suggested that if referral fees were banned, leading to the scrapping of CMCs, potential claimants could easily contact solicitors with the appropriate expertise.

The CSC has since mounted a challenge to his view, claiming that Jackson had fundamentally misunderstood the sector. It argues that CMCs play a vital role in providing claimants with support and increased access to justice.

As the clamour over referral fees grows, should the CMC market be cut out of the process? Insurance Times hears views from an insurer, a claimant’s representative and the chairman of the CSC on the pros and cons of this middleman.

David Fisher, liability claims technical manager, AXA

One of the major disadvantages of CMCs is that they have driven up the costs of handling PI claims. I fully accept from a solicitor’s perspective that an acquisition cost is something that has to be factored into their price, just as a marketing cost has to be factored into the products we buy on the high street.

But we now have the situation where the costs that are being charged by CMCs are disproportionate to the value they have added to the chain. All that is happening is that money is moving around the market, from which various people take a slice, and the price ultimately ends up being paid by the consumer or the policyholder that buys insurance.

You only have to read a paper or watch TV and you will see adverts for CMCs. There is no doubt that these companies’ whole raison d’être is to find claims. That tends to drive certain behaviours, which we have historically seen with The Accident Group and the old Claims Direct. That has brought about a whole raft of regulation as a result.

But there are still areas where regulation could be tightened, particularly with respect to the interface with other regulatory regimes, such as the Solicitors Regulation Authority. It should make some of the abuses that happened once in the past more difficult and it should ensure the claimant is more aware of what is going on in his name.

I think there is undoubtedly an argument for cutting out the middlemen and for solicitors to become more proactive. Solicitors are first and foremost lawyers. They are not necessarily businessmen. There is a need for solicitors to seek to develop their own brand and to attract their own clients, rather than purchasing through an intermediary like a CMC. An attempt by one relatively new entrant to directly advertise on television is an interesting move. Local radio could be another option.

Unless the issue of referral fees is addressed, I don’t think there will be a phasing out of CMCs. In the current legal model they are too heavily entrenched in the process. There are too many law firms whose entire business survives and thrives on buying work from them. I would support an argument for abolishing referral fees; not just for CMCs but for everyone else who is paying the middleman or the lawyer.

Typically, it costs a claimant lawyer £750 to acquire a claim from a CMC. The average cost on a motor claim is about £1,300. For each case where a solicitor gets £1,300, £750 is going to a middleman. I think the question is: what would the acquisition be without CMCs?

One does see some claimant law firms that will look to maximise cost whenever they can, and you have to conclude that this is partly driven by a desire to maximise profit because they have to pay over 50% of their fee to a middleman. CMCs thrive and perpetuate referral fees, and referral fees are a big barrier to the reform of the legal process.

James Sandbach, legal affairs policy adviser, Citizens Advice Bureau

The claims management sector has been able to identify consumers’ needs in a way that solicitors have not been able to. They have been introducing people to the market and encouraging them to pursue their legal rights.

The problem is that, when the market first emerged, it wasn’t regulated and some very bad practices developed from this regulatory gap, particularly in terms of marketing and failing to explain to clients and customers the potential cost of liability. There really is no such thing as totally cost-free litigation, where you are totally insulated from liability costs at any time in the future.

The “no win, no fee” label is very misleading.

We did see some very serious debt cases arising in 2002/03 because consumers had been mis-sold the conditional fee agreement (CFA). We still need more regulation, because the problem is the consumer simply doesn’t have the knowledge to insulate themselves against risks such as pursuing cases that are not going to go anywhere and the costs that have to be picked up somewhere along the line.

There needs to be a lot more consumer education alongside better regulation of the sector. One of the problems of the costs system is that it is so technical, complicated and full of incredibly complicated jargon that consumers don’t understand.

CMCs are always looking for new areas of business. In particular, we see that now in the provision of challenging consumer credit agreements. There is a lot of false marketing at the moment about being able to write off credit card debt.

In addition, when it comes to employment claims, CMCs are putting people through tribunals to make claims and operating a contingency fee system rather than a CFA system. If the contingency is 60%-70%, which it often can be, that is a very substantial proportion. I understand the MoJ is currently looking at capping those percentages.

There does need to be better regulation and standards. From our point of view, the CMC sector does improve and increase access to justice. But the feedback from claimants about their experience has been more negative than positive. Most of the problems are down to false marketing and targeting particular groups, particularly low-income communities. That has not been very helpful and has led to the myth of a compensation culture in the UK, which is not actually borne out by the evidence. Compared to other countries, the UK level of court claims is relatively low.

Darren Werth, chairman of the Claims Standards Council and managing director of Accident Advice Helpline

The benefits and advantages brought about through the existence of CMCs to the claimant and the claims process cannot and should not be underestimated. They provide a vital service in making the public aware of their legal entitlement, providing access to justice and acting as an invaluable bridge between the claimant and the legal profession. They provide the marketing and case management skills that are essential in any consumer-facing service industry.

Outside the services offered by claims management companies, there is no high-profile campaign funded through the government or otherwise, that seeks to raise claimants’ awareness of their rights. Insurers advertise for customers but have no incentive or interest to highlight the right to claim. CMCs provide a response centre where claimants can discuss details of their accident with people they can relate to, but who are nevertheless skilled in assessing the merit of personal injury claims. Often a great deal of investigation is done in order to eliminate spurious claims, and obtain witness evidence and details of the accident before passing such claims onto solicitors.

CMCs also have the ability to assess the correct specialist solicitor to handle each type of claim. Many provide out-of-hours customer services so that people who are at work can call the CMC after 5.30pm to progress their claim. The majority of solicitors continue to operate traditional hours, which restricts the ability for many claimants to access these services.  

While claimants continue to view solicitors as formal and unapproachable, and are concerned about costs that they may incur, the benefit to a solicitor of working with a CMC is that it allows them to dispense with their own expensive and uncertain marketing efforts and to replace that with a CMC that is an expert in marketing. This also allows the law firm to choose not only the types of cases it wants but also to choose the volume of cases it requires, thereby allowing it to efficiently manage its overheads and practice, and concentrate on running claims.

Having successfully helped to secure effective regulation of CMCs, the industry is keen to support reforms to the claims process so as to remove any unnecessary costs in the system and keep the processing cost to a minimum without prejudicing the rights of the claimant. Changes in protocols that would enable the admission of liability at an earlier stage, which substitute mediation for costly court proceedings, encourage more transparency and enable claimants to receive their compensation quicker, are all positive steps.

With the consent of the claimant, the CMC is in a strong position to control the claims process, and the regulators and industry as a whole should be engaging with CMCs to help map out any future process. IT