Preparing your Firm for the Referral Fee Ban TRACEY CALVERT

Transcription

1 Preparing your Firm for the Referral Fee Ban TRACEY CALVERT PUBLISHED BY IN ASSOCIATION WITH

2 Chapter 1: Understanding the changes which have been made THIS REPORT is about the ban on referral fees in personal injury work which came into effect on 1 April 2013 and, more specifically, is a consideration of the immediate impact that this will have in terms of regulatory compliance issues for law firms. This change requires lawyers in the personal injury sector to consider their relationships with third parties and how they introduce new clients to their business. They must ensure that they are compliant with the Legal Aid, Sentencing and Punishment of Offenders Act 2012 and the requirements of the SRA Handbook. However, this narrow analysis turns a blind eye to the wider picture which is that the ban is one of a complex series of initiatives designed to reform civil justice. All of the changes will be of consequence to lawyers operating in this area of practice. The changes mean that all aspects of civil litigation practice are undergoing a period of great upheaval which requires litigation lawyers to reflect on their business, on what they want to achieve in the future, and how they will achieve it. To repeat the often described rationale for these initiatives, the Government believes that the package of policy measures it supports will reduce costs in litigation and in turn improve access to justice. However, the impetus for change came from the Jackson Report which was commissioned by the judiciary and not the Government. Lord Justice Jackson has advocated a number of changes to civil litigation. In respect of referral fees, Lord Justice Jackson originally offered two alternatives either a blanket ban or capped payments which the Government did not endorse in the early stages of the reform process. The political viewpoint was that lawyers should be allowed to decide for themselves how to spend their money and how to attract business to their practices. This viewpoint later changed largely due to the contributions of politicians such as 1

3 Chapter 1: Understanding the changes which have been made Jack Straw, and as a result of their reaction and analysis of the huge growth of the personal injury market in recent years. It is believed that referral fees have created a 600 million industry, and have led to the higher overall cost of civil litigation, rising motor insurance premiums, increasing numbers of claims, and the perception of a compensation culture which encourages people to make claims for minor injuries or to create fictitious injuries which are hard to dispute. It is also believed that banning referral fees, along with the variety of other policy measures introduced, will reduce costs in individual cases and prevent activities that encourage people to claim when they might not otherwise have done so. Therefore the referral fee ban must be seen as part of a wider package of reforms which are now beginning to take shape. These include: Amendments to the Civil Procedure Rules 1998 (CPR) so that with effect from 1 April, the overriding objective of the Rules is to enable the court to deal with costs justly (as has always been the case) and, now, at proportionate cost; Simplification of Part 3.9 of the CPR in respect of provisions relating to relief from sanctions; Amendments to Parts 32 and 35 of the CPR in respect of experts reports; A new rule on proportionality; Amendments to Part 36 offers, with uplifts offered where a claimant makes a reasonable offer to settle their case; An increase in general damages; Budgeting requirements; Damages-based agreements; Reforms to Conditional Fee Agreements which end the recoverability of inter-party costs; Amendments of the RTA portal; and Qualified one-way costs shifting. The SRA have stated that the ban on referral fees in PI cases, the Jackson reforms, and changes to Road Traffic Act costs, and cuts to legal aid from April will affect many firms heavily reliant on this work. 1 2

4 Preparing your Firm for the Referral Fee Ban This report will touch upon this wider picture, which cannot be ignored, but is primarily focused on the non-negotiable aspects of the referral bans which matter to solicitors. This is because the ban will create obvious changes and has the added dimension of having regulatory significance. It creates a major challenge for solicitors in practice who must demonstrate to the SRA that they can rise to the task of complying in an outcomes-focused and risk-based manner, and bring on side all members of their firm. It is also a challenge to the SRA, as the regulator is obliged to enforce the ban through regulation and in doing so demonstrate their risk-based approached to regulation. This is, and always has been, a big issue. The payment of a fee to someone who introduces clients to a law firm has always been a controversial topic and has required some deep thinking on the part of both the regulator and the regulated. At the heart of the matter, fundamental questions must be analysed, including the following: Does an arrangement with a third party make you any less independent of mind? Does it fetter your relationship with your client? Even, who is your client? Can you do your best for your client? This means that referral arrangements have been a crucial topic for many years. The practice has been in and out of favour over many years, although since 2004 the conduct position has been that payment for a referral is not deemed to be improper behaviour. The regulator initially the Law Society and latterly the SRA had put in place conduct requirements within which practitioners must operate when making or receiving payments arising in connection with the introduction of clients. Initially this was in the infamous Solicitors Introduction and Referral Code 1990 and then in the Solicitors Code of Conduct In its latest transformation the requirements were described in the SRA Principles and the SRA Code of Conduct 2011 which appear in the SRA Handbook. 2 This position, and the legitimacy of such payments, is changing again with the withdrawal of the right to make or receive referral payments which came into effect through LASPO on 1 April This may be seen as a 3

5 Chapter 1: Understanding the changes which have been made step backwards again, although bear in mind that the ban refers to personal injury business only. So, whilst it is not improper to receive and make paid referrals in non-contentious matters (such as to estate agents and others in conveyancing), it is not acceptable in relation to referrals of clients in PI work. This is a controversial decision. Many critics notably the Legal Services Board have argued that the ban on payments is unnecessary. 3 As recently as 19 March 2013, the LSB Chairman, David Edmonds, appeared before the House of Commons Justice committee and said: I m both defensive and protective of our stance on referral fees I like to see markets operating in a way which markets can operate, which is that referrals are made and satisfactory solutions are found and you don t intervene where there is no evidence that you should intervene. He made the point that the Legal Services Consumer Panel had commissioned research and did not find any consumer detriment arising because of referral fees. 4 Whilst other stakeholders, including the senior judiciary, the Bar Council and the Law Society have supported the ban, this has not been without some expressions of concern. The Law Society supports the ban in principle but has doubts about the methodologies of LASPO: [W]e have reservations about the way in which the prohibition is drafted in LASPO and believe that it will potentially capture activities which are not problematic and which have been identified as non-problematic by the SRA, its members and by others. 5 The fear is that the position will return to that endured by regulators and others alike before the relaxation of the ban in That was a landscape in which all firms tried to reconcile the prohibition with ways to work with third parties and still encourage clients to use their particular legal services. What happened before 2004 and the lifting of the ban was that many arrangements masqueraded as something which was not a payment for the introduction of a client, and much time and energy was diverted to prove the legitimacy of arrangements. This was not just the energy of those in the business environment; scrutiny of arrangements was a major preoccupation of the regulator. Examples of the issues creating difficulties were frequently rehearsed in front of the Solicitors Disciplinary Tribunal (for example the cases of Reed SDT , Barber and Others SDT , and Tilbury SDT ) and in the courts (the Accident Group litigation and the old Claims Direct matters). 4

6 Preparing your Firm for the Referral Fee Ban Moving forward to 2013, it seems possible that this will be the case again, although, interestingly, the regulator with its long memory of previous preoccupations has said that the onus to justify what appears to be a prohibited payment will now be with the solicitor and their law firm. The immediate difficulties which the changes present to solicitors is largely down to timing issues, the need to ensure that the firm is compliant, and the need to reflect on the financial strains which may materialise. The change is in respect of payments made to third parties or received from them. If s firm has entered into an agreement before 1 April 2013 they will need to consider whether they can continue with the agreement thereafter; this is because an agreement which contravenes the ban will be unenforceable as well as putting the firm in breach of LASPO. However, some comfort comes from the SRA s statement that they do not consider that making a payment after 1 April 2013 in respect of a referral the firm received before 1 April 2013 will put them in breach of the ban. 6 References 1. From a speech by Samantha Barrass, SRA Executive Director, Law Society Risk and Compliance Conference, London, 15 March Available on the SRA website. See: 3. Cost benefit analysis of policy options related to referral fees in legal services, Legal Services Board, See: wp-content/media/2010-investigation-into-referral-fees-report.pdf. 4. LSB chairman warns MPs of unintended consequences of referral fee ban, Legal Futures, 20 March See: 5. Law Society response to the SRA Consultation on the ban on referral fees in personal injury cases, The Law Society, December See: org.uk/representation/policy-discussion/sra-consultation-ban-on-referral-fees-inpersonal-injury-cases/. 6. As expressed in the SRA s FAQs on the referral fee ban, published on 25 March See: 5