Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Referral Fees) Regulations 2013

Lord Newby Excerpts

Wednesday 12th June 2013 Grand Committee

Moved By

[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.

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[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.