ACCESS TO JUSTICE GROUP: RESPONSE TO SRA DISCUSSION PAPER ON REFERRAL FEE BAN

Transcription

1 ACCESS TO JUSTICE GROUP: RESPONSE TO SRA DISCUSSION PAPER ON REFERRAL FEE BAN Introduction The Access to Justice Action Group (AJAG) coordinates action to protect access to justice for claimants, particularly but not exclusively in the field of personal injury. Participation is open to organisations, representative bodies, law firms and businesses that support claimants. This includes claimants and victims support groups and charities, consumer organisations with a particular interest in legal services, solicitors firms and barristers, claims management companies, after the event insurers, trade unions and other membership organisations, and representative bodies. By way of preamble, it would be remiss of us not to restate our opposition to the ban on referral fees. We see this as running counter to access to justice for claimants, anti-competitive, likely to increase costs pressures through the loss of economies of scale, and nor do we believe there is any evidential base to substantiate the ban. We can expand on these arguments and the evidence to support them if requested to do so. Generally, we believe the overall approach advocated by the SRA to be a reasonable one. Effect on legal services market The effect of the ban will undoubtedly result in a contraction of the personal injury market. It will lead to greater concentration of this market amongst larger firms, as solicitors practices with lower caseloads will no longer be able to compete or find

2 such work profitable, especially in light of the other parallel Jackson inspired changes currently in train aimed to restrict costs and with a consequent reduction in access to justice. Smaller firms rely on CMCs to produce their case leads as they cannot afford effectively to promote their businesses individually in a highly competitive marketplace. They will go out of business, leave the market, or consolidate into larger firms or merge with or into larger CMCs forming ABSs. As the SRA paper says, an ABS is a legitimate business structure and removes the need for referrals. We would suggest none of these outcomes are in the consumer s interest but represent an inevitable consequence of the ban. However, we note that a number of ABSs were actively planned and proposed before the announcement of the ban but their applications are bogged down in the approval process. Some of the regulatory issues to be addressed The ban produces significant regulatory difficulties, some generic and some more specific to particular relationships. Dealing with generic issues first, the obvious problem is determining what payments are for provision of services and what are for mere referral information. There are three common areas of services commissioned externally, apart from introduction leads, but there could well be more in specific business relationships: Advertising Screening for merit Preliminary collection of evidence

3 And of course, any given arrangement could often involve a combination of two or three of these services. The Government s reserve power to impose a cap on fees for these services will be very difficult both to set and enforce. Advertising: Advertising covers such a wide range of services, the pooled and individually charged fees will be very difficult to determine for an individual firm contracting for such services through an agency or CMC as an advertising agent. It would be commercially sensitive for the commissioner of a collectively based advertising campaign ( usually a CMC) to tell its individual firm clients how many other firms it is working for, how much it is charging them and on what basis, and how many case those firms are obtaining as a result of the advertising campaign. Indeed without direct referrals, the CMC itself may well not know the answer to the latter question which itself would be commercially sensitive from the law firm s point of view. The scale of any given advertising campaign is also a factor. A national TV advertising campaign is inevitably considerably more expensive than a localised press campaign, and proving what share a particular firm may have incurred towards the cost of the campaign will be difficult to establish, both arithmetically and for commercial confidentiality reasons. We are not aware of any research to establish the true cost of solicitors marketing arrangements or indeed the extent to which there is any commonality of approach between one firm and another. Any two firms will have two different marketing strategies: one may want to spend more to attract more work, one less; one may aim at a niche market (e.g. targeting a minority community in its own language and cultural context) another aim at a confined geographic area and a third concentrate on a particular type of claim e.g.

4 clinical negligence. Each will have different cost implications, but what is clear is that joint marketing through a CMC is generally the most cost effective way of doing it. Screening: Case screening for merit or other issues can also incur differing charges, depending on how much screening and what criteria the firm wishes the CMC or other provider to apply. One firm may wish only to take cases virtually certain of success; another may apply a 50% rule. There can be other permutations depending on both prospects of success and likely value of the claim, which will become even more important if the changes to the small claims and fast track fixed costs thresholds come into effect. Each of these screening objectives will involve different amounts of work and the cost of this can be commercially sensitive. Similar considerations apply to preliminary evidence collection, with the various permutations above reflected by the extent to which a firm commissions investigation by agencies rather than doing the work, itself. Evidence gathering can be very expensive and varies enormously depending on the extent of work involved: for example, considerable work needs to be done to collect the information needed merely to place a case on the RTA portal system. All these factors will make any supervision by the SRA based on the firm s expenditure very difficult to monitor, either on a case by case basis or an overall package. It will be even harder for the government to set an evidence based cap figure to reflect all these permutations, involving a combination of the types of service and level of service provided.

5 Specific arrangements: There are also specific types of arrangement that will need to be considered. International business will be especially problematic, as for example cases involving a United States dimension. There, the standard method of business is through referral fees, and US firms referring cases to England would expect to receive a fee for the referral; and equally, would expect to pay a fee for the referral of a case form the UK to them. There could be considerable consumer detriment if this type of arrangement is not reflected in any regulatory regime. Another complication involves arrangements with disability charities, who often either have approved lists of firms, or refer cases directly. These arrangements will be difficult for SRA to monitor. When a firm makes a charitable donation, is that entirely altruistic or is it in expectation of a quid pro quo in either directly receiving cases or going on an approved list? And if on an approved list, would that count in these circumstances as paying a referral fee? Such income is increasingly important to charities as other sources of finance come under pressure due to economic circumstances. Not dissimilar concerns affect arrangements with membership organisations, especially trades unions. Different unions and firms have different arrangements, with, for example, attributed authored articles or advertising in union journals, hospitality, some unions doing more preliminary investigation or screening than others, and a varying degree of dependence of unions on income from their members PI case load. It may well be complex ABS arrangements between unions and law firms will emerge. However, the biggest market for referrals at present is undoubtedly the insurance industry itself, which also currently involves the highest referral fees, too. The FSA has shown itself very reluctant to become involved in this area of insurance work, so

6 the burden will fall more heavily on the SRA as a consequence. One issue will be whether insurers try to pass on part of their very high general advertising costs which are not directly related to claims to their panel law firms, which we suggest would be against the spirit of the law as well as the letter, and should not be allowed. Regulatory approach The SRA paper is correct to identify the fragmentation of regulation. In AJAG s submissions to the Government during the LASPO debates, we highlighted this as an issue and proposed that regulation should be consolidated with one regulator, which would have ensured a consistency of approach but regrettably the Government did not go down that route. Turning to the regulatory approach, we would endorse the suggestion of a risk based and outcome focussed process. Potentially, there could be a very large number of interventions by the SRA to administer the ban and the SRA will need substantial staffing and other resources to cope with this. Looking at the issue from the supplier side, the problems here have generally been caused by smaller CMCs that do not register, or individuals operating entirely outside the regime as de facto CMCs. Another high risk area is represented by offshore marketing companies, who in large part are responsible for the cold calling and texting, which is of course banned under the present regulatory regime anyway. The larger, well managed, CMCs pose far less risk as they have no interest in operating unlawfully given the size of their operations. We would suggest a risk based and proportionate approach should focus on law firms, who engage with smaller CMCs, including those CMCs and individuals that are not registered with the MoJ (who should be outlawed under the existing rules

7 anyway), and those CMCs operating offshore, as inevitably they will be at higher risk of falling of the ban. This will usually involve the smaller firms too, we who will be facing the toughest market pressures as a consequence of the overall package of change, will be more likely as a consequence to cut corners, and are the least likely to have the full record keeping and systems paperwork in place to demonstrate compliance. The obviously blatant breaches, such as incentive advertising, should be tackled as a first step. The current Code is very tight in its controls of the existing referral fee system, and the real issue about the Code has not been its formal wording or terms, but the question of voluntary compliance and ultimately enforcement. We do not therefore see a need for a wholesale change in the terms of the Code itself. We would endorse the first outcome example given at para 31, which suggests the key outcome should be only to enter into arrangements that comply with the law. The more that is expanded, the more scope there then comes for argument, though there is a case for the SRA to issue guidance on interpretation of the new law, which is far from clear, for example on pooled solicitors marketing arrangements. One issue that may well arise in the other outcome suggestions is the definition of personal injury, for example, when a claim combines a number of heads of damage and the PI element is incidental to a much bigger case, involving property loss or hire charges. The indicative behaviour suggestions are also sensible, in the context of an SRA role that is geared towards assisting firms to improve compliance and spreading good practice, rather than formal enforcement action at too early a stage. There needs to be adequate time for solicitors business models dependent on referral fees to be changed.

8 Conclusion Overall, though, our concern is that the effect of the ban will be to reduce transparency, despite the efforts of the regulators, as was the case before referral fees were permitted, and will be of detriment to the consumer in reducing choice and awareness of their rights, thus restricting access to justice. Andrew Dismore Co-ordinator Access to Justice Action Group