Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Referral Fees) Regulations 2013
(11 years, 5 months ago)
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Lord Newby
That the Grand Committee do report to the House that it has considered the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Referral Fees) Regulations 2013
Relevant documents: 2nd Report from the Joint Committee on Statutory Instruments
Lord Newby
My Lords, these regulations concern the ban on referral fees introduced by the Legal Aid, Sentencing and Punishment of Offenders Act 2012. They make provision for the implementation of the ban in two specific areas. First, they provide for the ban on referral fees to apply to certain types of financial services firm—namely, those in the insurance sector. Secondly, they provide for the enforcement of the ban, as it applies to financial firms, by the Financial Conduct Authority.
I turn first to the rationale for the ban. In late 2008 Lord Justice Jackson was commissioned to undertake a review of the rules and principles governing the costs of civil litigation in England and Wales and to make recommendations to promote access to justice at proportionate costs. His report set out a number of proposals to tackle the disproportionate costs of civil litigation. In responding to these proposals the Ministry of Justice included provisions to ban referral fees in relation to personal injury cases in the LASPO Act 2012. Referral fees are typically paid by solicitors to third parties who refer business to them. Most personal injury claims are referred to solicitors by claims management companies. However, other parties, such as insurers, are also often involved. In cases where policyholders contact insurers to make a claim on their motor insurance policy, the insurer may check whether there is a related personal injury claim and refer the policyholder to a lawyer in return for a fee. If the case is successful, the lawyer’s costs, including the referral fee, would be recovered from the losing defendant. In many cases, the losing defendant could be another insurance company.
Referral fee payments have increased from around £250 per case in 2004 to around £800 per case in 2009. Both the Law Society and the Association of British Insurers raised the concern that the circular flow of money generated by referral fees incentivises and rewards making claims and therefore inflates the cost of claims and ultimately insurance premiums. According to the ABI, the average insurance premium increased by approximately 10% from 2009 to 2010 in order to make up for insurance underwriting losses of over £2 billion in 2010, when 20p was lost in every £1 of premium earned.
Lord Justice Jackson recommended that the payment and receipt of referral fees should be banned. A ban discourages lawyers from bringing unnecessary claims for compensation, including unmeritorious lower-value claims, while reducing the overall level of legal costs in personal injury cases and related insurance costs. The Ministry of Justice took forward Lord Justice Jackson’s recommendations. Rules against referral fees in personal injury cases were included in the LASPO Act 2012. The rules cover both the payment and the receipt of referral fees. The ban captures all the main businesses involved, such as solicitors, claims management companies, insurers and insurance intermediaries. Under the provisions of the 2012 Act, the individual regulators in each sector are required to effectively enforce the ban. For regulated financial services firms, the relevant regulator is the FCA.
I will now explain the specifics of the regulation. The provisions in Sections 56 to 60 of the LASPO Act 2012 introduce rules against the payment and receipt of referral fees for legal services in relation to personal injury cases. The ban on the payment and receipt of referral fees generally came into effect on 1 April.
Lord Beecham
My Lords, today is perhaps the first bite of the regulatory apple in as much as the noble Lord, Lord Hodgson, has a Question on Monday, to which the Minister will be replying, on the impact of this measure on the introduction of alternative business structures. We will no doubt be returning to that aspect later.
I am always impressed by how the Government rely on Lord Justice Jackson’s report, except when it comes to his very strong assertion that legal aid should have remained intact. It is a very selective approach—we are moving from apples to cherries in terms of our botanical analogies. Having said that, we have no objection to a ban on referral fees in general, although I am bound to say that I was a little surprised that my noble friend Lady Hayter reported to me that in her experience in the consumer world, in which she is heavily engaged, consumers apparently very much like the referral fee system and going through a referring body to solicitors. It was rather a surprise and, perhaps, a disappointment to me. I declare an interest as a solicitor, although now an unpaid consultant in my old firm.
Be that as it may, there were certainly abuses, particularly in claims management companies but also by the very insurance companies that have constantly pressed the Government, now successfully, on their need to reduce the likelihood of litigation by making it more difficult and more expensive for litigants to obtain justice. The limits, particularly on claims of less than £25,000 for personal injuries, will be subject to a very strict regime in terms of costs that may well make it uneconomic for solicitors to pursue them—but that, I guess, is a different matter.
The ceaseless advertising and constant cold calling from which many of us still suffer have been a nuisance. I do not know how many times I have been told that I have a claim under PPI—mind you, if I had, it does not look as though Lloyds Bank would be paying up. Insurance companies in particular and claims management companies abused their position, so we have no objection in principle to the ban.
Having said that, there are areas in which the extension was not justified, which I mentioned in debate on the LASPO Bill, as it then was—in particular, the ban on referral fees to non-profit organisations and trade unions, because they are regarded in the same light as those commercial organisations. I thought then and I think now that that equivalence does not exist, but we are where we are.
I note from the Explanatory Notes that the FCA has issued guidance notes to firms affected by the regulations. I am bound to say that I could not trace those when I looked online, but they may exist. It would have been helpful had I had them but I assume that they have been issued, as the Explanatory Notes state that they have. The noble Lord might want to check that before Monday.
It is interesting that the Legal Services Board has also issued guidance on referral fees. My noble friend Lady Hayter has copied to me a letter dated 21 August 2012 that seems to have been addressed to all approved regulators, so I suppose that that includes the Solicitors Regulation Authority, the FSA and possibly other bodies as well—the Institute of Chartered Accountants in England and Wales, or whatever. I am not sure, and the Minister may not be able to tell me today, whether the FCA guidance reflects the guidance previously offered by the Legal Services Board. I note from the Explanatory Notes that there was no consultation on this statutory instrument, which puzzles me because if the Legal Services Board pronounced some months ago, unless the FCA simply adopted its guidance, one would have thought that it would have at least consulted the Legal Services Board and possibly other bodies. I am curious about that apparent turn of events.
The Legal Services Board stated in its letter—this may reflect the substance of the question of the noble Lord, Lord Hodgson last Monday—that on the rules against referral fees in personal injury matters,
“it will be important to ensure that such rules do not go beyond the obligations in LASPO. That legislation bans referral fees, but does not prohibit, for example, new alternative business structures that effectively do away with the need for a referral”.
That is the Question that the Minister will be asked on Monday. It looks as though the Legal Services Board was saying at that point—admittedly, that was before the regulations were issued—that the ABS would effectively, as it states,
“do away with the need for referral”,
and therefore, presumably, for referral fees. It states:
“A liberal approach that supports the regulatory objectives of the Legal Services Act 2007, while properly delivering the legislative intent of LASPO, will therefore be crucial in making sure that both pieces of legislation are implemented effectively”.
It is not clear what its view was or now would be on the regulations, but it appears to be taking a somewhat different position from that which I suspect that the FCA and the noble Lord would anticipate.
The board went on to state that its guidance on referral fees applied across all segments of the legal market, whereas at the moment we have a ban in respect only of personal injury. That is because the ban on personal injury suits the insurance industry, and we know how influential the insurance industry is with at least one of the coalition government parties. The board states:
“In particular, regulators will need to justify any ban on the payment or receipt of referral fees that remains in place with clear supporting evidence”—
and that, in respect of personal injury, regulators will rely on the provisions of the Act—
“and to take proper account of the rest of the guidance”,
including transparency and the like. So we question, with regard to other areas of law beyond those that are the subject of these regulations, when, if at all, the referral fee ban would be extended to other areas of law. Perhaps the noble Lord could enlighten us about that—again, if not today, then subsequently.
Lest it be thought that this is a straightforward matter, there has been an interesting duel about the effect of this ban in the pages of the Law Gazette between two authors, whose names I do not have, and two QCs. The later of the two articles is from the two QCs who find that the Solicitors Regulation Authority—which is of course the primary regulatory body for the profession and will have to oversee the conduct in the situation as opposed to the operation of the ban—has been clear about how the position will work. Meanwhile, in the previous article, considerable doubt was cast on the effect of the proposed ban. I am fairly persuaded by the position that the two QCs adopt; they seem to argue their case effectively. However, this illustrates that, even here, there may be some grey areas that will provoke not further litigation, hopefully, but at least correspondence and some difficulty—particularly on the part of those involved in understanding exactly what it is that they are required to do or, more particularly, what they are required not to do on referral fees. I suspect that that matter will be included in part of the questioning that will occur on Monday.
Having said that, the Opposition do not object to the regulations. They will be reviewed over the next few years and we will see how they go. I reiterate, however, that it is most unfortunate that they extend to non-profit-making bodies, but that argument was fought and lost during the passage of the Act.
Lord Newby
My Lords, I am most grateful to the noble Lord for his thoughtful comments on these draft regulations. I will attempt to deal with his questions as best I might.
I have an introductory comment. The noble Lord referred to the noble Baroness, Lady Hayter, saying that the referral fee system was supported by some people. The thing that no one is objecting to is referrals. People are objecting to the fact that people are now being paid probably more than £800 on average to do it. That is a heck of a lot of cash. The problem is that it pushes up insurance payments to everyone and gives an incentive to the referrers to refer anything because they are on a winning ticket: if the case is taken up they get their fee, and if it is not then they do not lose anything. That means that there is a perverse incentive in the system for people to take cases that may or may not have huge validity, particularly when the amount being claimed is relatively small. If I am right in thinking that people like the prospect of being referred on but do not like the idea of paying fees, I would have thought that that would apply to NGOs, unions and others as well. However, as the noble Lord said, we are not discussing that principle today; the die is cast on that one.
The noble Lord asked about alternative business structures and whether they would be able to get around the ban. As the Committee knows, the Government strongly support alternative business structures to increase competition and innovation. Alternative business structures do not allow organisations to avoid the ban but allow them flexibility to operate in the personal injury market in a way that is compliant with the law.