Is this the end of referral fees?

‘Referral fee’ is a somewhat tainted, and decidedly shady, term in the insurance world. It is no secret that insurers and brokers take sums of up to £750 from solicitors in exchange for the details of an injured person to pursue a claim.

With 400,000 road traffic accident cases a year, the total value of the claims management market is around a quarter of a billion pounds.

Referral fees have generated a considerable amount of regulatory discussion. The issue is being attacked from a number of angles, with unregulated claims management companies being the primary target.

The government’s proposed reforms of the claims process, published on 20 April, should eventually bring some clarity to a realm seen by some as ravaged by self-interest and abuse.

In the extensive interim a new law, introduced on 23 April, will assist in this.

It is the second part of the 2006 Compensation Act, which covers commercial claims management services and claims in a range of areas including: personal injury; employment; housing disrepair; industrial injuries disablement benefits; criminal injury; and financial products and services.

The FSA currently regulates brokers for their direct insurance activities, but not for third party areas, including claims capture.

Under the new legislation, brokers who refer a large volume (25 cases per calender quarter) of personal injury claims to solicitors must gain authorisation from the Ministry of Justice. Without prior authorisation, exemption or waiver, stiff penalties – such as up to two years’ imprisonment – can be imposed.

Brokers behind bars

It sounds serious enough, but how many brokers can we realistically expect to see behind bars?

The answer is very few. The new regulations apply only if there is no legal expenses insurance in place, and clients are advised by a broker how to pursue a claim.

Although some brokers now face a second regulator, the legislation is aimed at those who fall outside the glare of the FSA. In effect this means the larger players, such as those who ‘ ‘ have set up separate claims management companies.

So there could be some high profile wrist slappings. But that may be the end of it. The Ministry of Justice is keen to add that it is not a question of size, but behaviour.

“What matters is not how big they are, but what they are doing,” says Mark Boleat, head of claims management regulation.

Andrew Welch, head of litigation at Stephensons, says: “By and large, brokers don’t contribute to this market.

“They don’t hang around on street corners trying to drum up claims. Their business is being insurance brokers.”

Authorisation process

The authorisation process is relatively straightforward. Brokers must fill out paperwork declaring their turnover related to claims management.

Despite its simplicity, the response from brokers has not been as hoped.

“The number of brokers that have come forward is at the low end of expectations,” says Steve White, head of compliance and training at Biba.

“In other areas that the compensation paper has touched, they have been at the high end.”

“Brokers don’t hang around on street corners trying to drum up claims. Their business is being insurance brokers

Andrew Welch, Stephensons

TheMinistry of Justice, however, insists that it had no such expectations. It said that 159 organisations had filed for authorisation so far.

But Boleat insists: “This legislation is capable of providing the regulation the market needs.”

What is clear is that double regulation serves no one’s interest.

The Ministry of Justice is rightly optimistic that the combination of its consultation paper and the Compensation Act will have a significant effect on the claims management market, curbing the scope for malpractice.

With over 1,100 intermediaries in this market, mainly specialists in claims management, this scope is colossal.

There is a difference, after all, between making a law and enforcing it. Non-compliance with regulation is endemic, and no one doubts it is a difficult sector to regulate. There are also implications for fraud.

As a result, the idea with the new legislation is that it will be self-policing. Just as brokers will not be allowed to make referrals beyond a limit, solicitors will not be allowed to accept them.

“If solicitors stop accepting claims, then organisations will stop appealing to them,” Welch adds. “The idea is to remove the market.”

The Law Society, which regulates solicitors, has also said it would be “cracking down on solicitors whose referral arrangements compromise their clients’ interests, and who undermine public confidence in solicitors”.

The results have implications for brokers.

Under their revised code of conduct, solictors must disclose details of referral fees to claimants.

Clearly, some brokers will be less pleased about details of their business practice being made available to their clients.

On the other hand, it could be argued that a broker’s business is based on commission, and referral fees are a necessary part of that process.

Broker relations

Either way, the new legislation will affect broker relations with policyholders, if not referrals themselves. There are reasons to believe the situation could change, however.

The voracious appetite of price-driven e-business could change the face of the market. With increasingly stripped down forms of cover, there will be a rise in the number of policy holders who do not have legal expenses cover. This will impact on referral fees – except not in the way the government would have hoped.

Indeed, while the Compensation Act is a worthy attempt to bring regulation to claims management, it is generally accepted that the elimination of referral fees is on the nigh side of impossible.

Moving toward transparency – coupled with a healthy dose of accountability – is the next best thing. Boleat adds: “There is no government policy to get rid of referral fees. Our policy is about disclosure.”

What this means for brokers is the outlook will remain distinctly hazy. It is difficult, after all, to fight an enemy that you cannot see, as White concludes: “The problem is no one really knows how much – or how many – brokers are doing it.”

In the meantime it is a step, albeit a small one, in the right direction.