PM warms to ban as tide turns on referral fees

The pressure on ministers to abandon referral fees is growing after prime minister David Cameron said he was “very sympathetic” towards a ban.

His remarks came as Zurich announced brokers must declare referral fee income from its customers and Admiral’s share price continued to slide under speculation that a ban could hurt profits.

The campaign by former justice secretary Jack Straw to ban referral fees is beginning to take effect and he is believed to have gathered significant support in the Commons.

Straw has also spurred the Information Commission into action, which is investigating whether insurers are breaking the law by selling customer information to personal injury lawyers.

Cameron admitted he had been swayed by Straw, telling parliament: “My honourable friend makes a very good point about the problem of referral fees that are driving up the cost of insurance for many people. Mr Straw has made some very powerful points about this. There was a report to the government calling for referral fees to be banned.

“I am very sympathetic to this, and I know my right honourable and learned friend the justice secretary is too, and we hope to make some progress on this issue.”

Cameron’s comments follow those made last week by justice minister Lord McNally, when he also expressed sympathy for a referral fee ban.

Meanwhile, Zurich insists details over referral fee payments are written into the Terms of Business Arrangement (TOBA) with brokers.“

This is about us wanting clarity of what processes our brokers are deploying with regards to claims handling,” said Zurich personal lines director Gareth Howell. “This isn’t just referral fees, the principle applies to all aspects of claims handling.

“This information will be part – albeit a small one – of our considerations with regards to how we commercially trade with each of our brokers. And the principle of transparency is a reciprocal one: we will be transparent back with brokers with regards to the position we commercially take with each of them.”

The threat of a referral fee ban could hurt brokers such as Swinton, which makes money from the payments. Motor insurers such as Admiral, which refuses to disclose how much money it earns from referral fees, would also be hit.

Admiral’s share price hit an all-time low this month at 1527p from a high of 1750p.

The FTSE 100 insurer, which made a pre-tax profit of £275.9m in its UK motor business in 2010, attributes 52% (£142.4m) of the full year profit to “ancillary” sales. Referral fees could make up 10% net profit or between 15% and 30% of ancillary income.

There is speculation that chief operating officer David Stevens and chief executive Henry Engelhardt may reveal the earnings from referral fees at the half-year results on 24 August.

AXA has taken the strongest position by refusing to take referral fee payments, but so far, no other company has followed it.

Although AXA’s declaration was a public relations coup, generating widespread publicity around the time Straw declared war on the issue, some privately believe it to be a calculated gamble.

If the government pushes ahead with a referral fee ban, which is looking increasingly likely, AXA can claim the moral high ground as the first insurer to break ranks.

However, a decision to uphold referral fees could mean the French-based insurer misses out on a significant revenue stream, especially when it is expanding its personal lines motor book so aggressively through Swiftcover.

Talking points …

? The bets are now on that the government will push through a referral fee ban. How will brokers and insurers adapt their business models for the change?

? Will insurers and brokers use the ‘Tesco Law’ coming in later this year, which will open competition to owning law firms, to buy a law firm and circumvent a referral ban by ‘passing on’ work?

? How long can Admiral resist calls to come clean on how much it earns from referral fees? The motor insurer has enjoyed a stellar performance on the stock market, but for the first time, people are asking questions over the sustainability of the model.