Legal blog: the blame game

For all those who have been tracking the government’s deliberations over the past few months, the announcement that it intends to ban referral fees in personal injury cases would have come as no surprise. The practice, widely enjoyed by the large majority of insurers, has become increasingly discredited – despite the ABI’s attempts to justify and defend insurers’ position. 

However, there will almost certainly be – in the words of Lord Justice Jackson –  “unintended consequences” of an outright ban. Jonathan Djanogly, the parliamentary under-secretary of state at the ministry of justice, said earlier this year that he thought the abolition of referral fees would distort the market. Certainly, my impression was that he felt things were best left alone. 

The move would put considerable pressure on a number of business models. It is not only insurers that receive these fees – it is also brokers, claims management companies and other third-party intermediaries. I have never been entirely convinced by the argument that the existence of referral fees increases the frequency of claims, but there is little doubt that a number of businesses now depend upon them for their survival.

Not surprisingly, the claimant solicitor community has stridently defended the part that referral fees play. They say that, ultimately, they are not the beneficiaries of these fees – that the fees put considerable strain on their cashflows and that they would be able to access victims of injury in other ways if referral fees were abolished. While there must be some truth in that, the larger claimant firms do benefit from the steady stream of referrals from before-the-event insurers and they are happy to pay the fee in lieu of having to market their services more extensively to the wider public.

Where now?

I have always believed that any abolition of referral fee has to have a concomitant reduction in fixed fees that can be recovered in claimant personal injury cases.  It is fair criticism to say that if referral fees were removed completely, the only beneficiaries at the moment would be claimants’ solicitors.

I suspect the government will almost certainly use this as an opportunity to reduce the recoverable fixed fee, which will have the considerable benefit of taking genuine cost out of the system. That, I believe, is what Lord Justice Jackson anticipated and it was something of a surprise that this recommendation in his report was ignored.

So, now we have a proportion of the insurance industry blaming claimant solicitors for making excessive profit and claimant solicitors pointing to the insurance industry as the beneficiary of referral fees. The simple fact is that the payment and receipt of these fees does nothing to help injury victims. There is no reason to imagine that the quality of service victims receive when pursuing claims would be adversely affected by the abolition of referral fees. Their existence has been the elephant in the room for some years and it is good to see the government taking positive action to eradicate costs from a necessary process, which indirectly will benefit all of us.

Tim Oliver is president of Forum of Insurance Lawyers (FOIL).