Referral fees: How hard will brokers be hit?

The very day that parliament resumes after the summer recess, 13 September, top of the agenda will be to debate a potential clampdown on referral fees.

Jack Straw is leading a campaign to ban the payments that some in the insurance industry receive from personal injury lawyers and claims management firms for passing on details of accident victims - and parliament is understood to be sympathetic.

Analysts such as Panmure Gordon are forecasting that the fees will be outlawed. While the potential impact of this on insurers has been discussed, many personal lines brokers benefit from referral fees too, so with a ban looming, how hard could brokers be hit?

Like insurers, brokers that accept the payments make from £300 up to a lucrative £1,000 per claim, yet scrapping the fees would actually hit them harder. Collins Stewart analyst Ben Cohen says: “Banning or even reducing referral fees would be particularly negative for brokers.” While insurers would benefit if an end to the fees reduced their underwriting loss costs, “brokers would not get this benefit - they would just lose the fee income”.

As far as brokers relying heavily on referral fees that are listed or planning to float are concerned, this is going to spook investors. Cohen says: “It would be helpful, from an investor’s point of view, to have clarity. With any companies coming to market with large personal lines businesses, the current lack of clarity stops us being able to monitor the situation.”

However, those in the personal lines broking community rely on referral fees to very different degrees. Insurance Timesspoke to a sample of firms and found that each one would be affected by a ban in different ways:

Swinton

‘We’re not particularly worried - there are always changes and you adapt to them’

Chairman of the high street broker Patrick Smith says: “Some push referral fees harder, some do not, and we are in the middle of the scale. We certainly avoid the controversial end of things, where old claims are being worked and customers being chased.

“The income we have gained through referral fees – which is within the industry average of £300 to £1,000 that has been published - has been lost on the other side, through lines that are being written at a loss. This means scrapping the fees could lead to retail rates hardening.

“I am not particularly worried about a ban as there are always changes in the marketplace and you adapt to them. It’s a reasonable debate and we will be comfortable with any outcome – especially as all brokers will be affected, so it will be equally uncomfortable for everyone.

Plus, even if the fees as we know them go, there will still be a need for someone to look after the third party policy holder. So there will be some sort of claims management and since the first-party insurer does not necessarily have the third party’s interests at heart, it will be down to the broker.

“We have not changed anything we do since the debate started, we are happy to wait and see how it goes.”

Ashbourne

‘It would create a level playing field between us and big brokers’

Peter Smiths, managing director of this family-run broker based in two offices on the Hertfordshire and Essex border, says: “We welcome a clampdown on the payments because it would create a more level playing field between us and big brokers.

“We do get an income from referral fees but it is less than 1% of our turnover. Because we are a face-to-face, touch-and-feel broker, we are not like web- and telephone-based brokers that are writing business at a loss and basing their revenue on referral fees. The big brokers making £1,000 per claim are the ones that will be worried.

“For 20 years, we have been aligned with an accident recovery business and this is because they give our customers good service, not because of fees. Neither have we used the amount of referrals we could generate as a bargaining chip to hammer lower prices out of people, we have just tried to focus on getting a good service for our customers.

“There is a danger that if referral fees are stopped, essentially the same transaction could take place ‘under the table’, for example in the form of a so-called ‘administration fee’. This is a massive business, so just saying it is banned is not going to stop it.”

Brokerbility

‘Referral fees are immoral - we do not and will not take part in this”

The 35-member network’s chairman Ashwin Mistry says: “We think referral fees are immoral. You should recommend a lawyer because they are good, not because they are giving you the highest fee.

“Networks can get a percentage of referral fees but we do not and will not take part in this. If you have a successful business, why would you delve into a non-transparent area that could potentially disadvantage your client?

“If brokers accept any fees, this must be made clear to the customer at the point of sale.

“We are writing documents currently for our members on what should and can be taken and what should be disclosed, and we’re planning to run events on these guidelines. The basic message will be if you take it, disclose it. And if you don’t disclose it, do not take it.”

Bluefin

‘The fees were not a huge part of our business - this will have a negligible effect’

Managing director Mike Bruce says: “As part of AXA [which recently scrapped the fees], we followed their line and no longer take them.

“As we had only just started in this area – our legacy businesses having not been involved in claims outsourcing – the business has been cut off before it really got started.

“So the fees were not a huge part of our business and this will have a negligible effect. Will we do anything to replace the revenue lost? Not directly. There are many other bigger issues on our radar.”