Industry referral fees stance is ‘preposterous’, says Straw

Jack Straw has branded as “preposterous” the idea that competition law constraints would bar insurers from taking an industry-wide stance to shun referral fees.

The ABI backs a government ban on referral fees, but says it cannot get its members to collectively cease their participation in the controversial practice.

In an interview with Insurance Times , the ex-justice secretary said: “It has become conventional wisdom and it’s nonsense.”

Straw has also accused companies of breaking data protection legislation by supplying customers’ crash details to claims lawyers without their explicit consent.

“Nobody seriously thinks that the Office of Fair Trading is going to refer the insurers to the Competition Commission because they are ensuring that the law is applied.”

Responding to Straw’s comment, an ABI spokesman said: “The legal advice we obtained suggested that this could be an issue.

“The key point here is nothing less than a ban across the board will work – even if those insurers that receive referral fee income all stopped tomorrow, others such as claims management firms, would continue to exploit the system, so encouraging fraudulent and frivilous claims. And this would drive up delay and costs in the system.”

Straw’s comments follow his announcement last week that he will support a referral fee ban via an amendment to the Legal Aid, Sentencing and Punishment of Offenders Bill, which cleared its first parliamentary hurdle last week.

He told Insurance Times that he hoped to meet Ken Clarke, his successor as justice secretary, to discuss the amendment, which he is drafting with the ABI.

Straw has also been invited to give evidence to the transport select committee, which has announced that it is reopening its inquiry into the rising cost of motor insurance.

Chartered Insurance Institute chief executive Sandy Scott backed an abolition of referral fees. He said: “Referral fees stink. Why don’t we just stop doing them? We need to collectively tackle our reputation.”

The row over referral fees, which looks set to be further inflamed by a BBC Panorama investigation into the topic next week, has also increased the pressure on Admiral to reveal how much it makes from the controversial revenue stream in its first-half results.

AXA announced last week that it has stopped accepting referral fees after news reports triggered a furore about accepting the payments.

Rating agency Moody’s said AXA’s move will put pressure on its peers to follow suit, including Admiral.

“We might get some more [detail] than we have had historically in Admiral’s first-half numbers because of all the debate,” Jefferies analyst James Shuck said. Admiral declined to comment on when it would disclose more about referral fees.

Shuck said the firm has disclosed “enough” information about ancillary income, but does not give full details because it deems the information commercially sensitive.

He estimated that referral fees make up around 10% of Admiral’s net income, on the assumption that a third of the ancillary income is from fees in general, of which 50% are referral fees. As a result, he contended a ban would be negative for Admiral, particularly because of the company’s structure. Admiral retained 27.5% of its UK premium in 2010, ceding the rest to reinsurers, mainly Munich Re, which took 45% of the book. However, it kept all of its ancillary income.

Admiral’s underwriting profit contributed £52.7m to its UK motor profit before tax of £275.8m, while ancillary income brought in £142.4m.

“To the extent that referral fees leave the underwriting system, that would be positive for underwriting profits, but that is then offset by the loss of fee income, and that is more important for Admiral than it is for other companies because of the reinsurance agreements.”

But the referral fee furore has failed to trigger a drop in Admiral’s stock price, which increased 2.3% in the week to 4 July.

Admiral will release its first-half results on 24 August.