Legal Aid, Sentencing and Punishment of Offenders Bill

Jonathan Djanogly Excerpts

Tuesday 1st November 2011 Commons Chamber

Brought up, and read the First time.

[The Parliamentary Under-Secretary of State for Justice (Mr Jonathan Djanogly)]

I beg to move, That the clause be read a Second time.

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

With this it will be convenient to discuss the following: Amendment (a), after first ‘paid’ in (1)(a), insert

‘will be paid, has made an agreement to be paid,’.

Amendment (b), after ‘pays’ in (1)(b), insert

‘will pay, has made an agreement to pay’.

Amendment (c), after first ‘paid’ in (2)(b), insert

‘will be paid, has made an agreement to be paid,’.

Amendment (e), at end of (4)(b), insert—

‘(2A) A breach of the provisions of this section shall be an offence, punishable on summary conviction by a fine not exceeding the statutory maximum or on indictment for a term of imprisonment not exceeding two years, or a fine, or both.’.

Government new clause 19—Effect of the rules against referral fees—

‘(1) The relevant regulator must ensure that it has appropriate arrangements for monitoring and enforcing the restrictions imposed on regulated persons by section [Rules against referral fees].

(2) A regulator may make rules for the purposes of subsection (1).

(3) The rules may in particular provide for the relevant regulator to exercise in relation to anything done in breach of that section any powers (subject to subsections (5) and (6)) that the regulator would have in relation to anything done by the regulated person in breach of another restriction.

(4) Where the relevant regulator is the Financial Services Authority, section [Regulation by the FSA] applies instead of subsections (1) to (3) (and (7) to (9)).

(5) A breach of section [Rules against referral fees]—

(a) does not make a person guilty of an offence, and

(b) does not give rise to a right of action for breach of statutory duty.

(6) A breach of section [Rules against referral fees] does not make anything void or unenforceable, but a contract to make or pay for a referral or arrangement in breach of that section is unenforceable.

(7) Subsection (8) applies in a case where—

(a) a referral of prescribed legal business has been made by or to a regulated person, or

(b) a regulated person has made an arrangement as mentioned in section [Rules against referral fees](2)(a),

and it appears to the regulator that a payment made to or by the regulated person may be a payment for the referral or for making the arrangement (a “referral fee”).

(8) Rules under subsection (2) may provide for the payment to be treated as a referral fee unless the regulated person shows that the payment was made—

(a) as consideration for the provision of services, or

(b) for another reason,

and not as a referral fee.

(9) For the purposes of provision made by virtue of subsection (8) a payment that would otherwise be regarded as consideration for the provision of services of any description may be treated as a referral fee if it exceeds the amount specified in relation to services of that description in regulations made by the Lord Chancellor.’.

Amendment (a) to new clause 19, leave out subsection 5.

Amendment (b), leave out from ‘services’ in (8)(a) to end of paragraph (b) and insert

‘but only where the consideration was proportionate and reasonable in the circumstances.’.

Government new clause 20—Regulation by the FSA.

Government new clause 21—Regulators and regulated persons.

Government new clause 22—Referral fees: regulations.

Government amendment 139.

--- Later in debate ---

[Mr Djanogly]

New clauses 18 to 22 seek to prohibit the payment and receipt of referral fees in personal injury cases by regulated persons, namely solicitors, barristers, claim management companies and insurers.

I pay tribute at the outset to the work of the right hon. Member for Blackburn (Mr Straw) in pursuing the case for a ban on referral fees. I know that there are some differences between us about the detail of how we should implement the ban—we will come to his amendments in due course—but those differences of detail should not obscure our agreement in principle on tackling this important issue. I acknowledge his efforts in this regard.

I must also mention the consistent campaign by the right hon. Member for Berwick-upon-Tweed (Sir Alan Beith) as Chair of the Justice Committee, who has also been a very keen supporter of the ban. I note that last week his Committee formally welcomed our commitment to the ban, which will be implemented by these clauses. I should also acknowledge the work of the Transport Committee, chaired by the hon. Member for Liverpool, Riverside (Mrs Ellman), before whom I was privileged to appear last month.

My right hon. and learned Friend the Secretary of State for Justice announced the Government’s intention to ban the payment and receipt of referral fees in personal injury cases by way of a written ministerial statement to the House on 9 September 2011.

I strongly believe that the current arrangements under which lawyers and others are able to pay and receive fees for referring work have led to both higher costs and the growth of an industry that pursues claimants for profit. By introducing the new clause, the Government are taking decisive and much needed action to remove these incentives.

Right hon. and hon. Members will be aware that Lord Justice Jackson recommended that referral fees should be banned as part of his comprehensive package of recommendations to make the costs of the civil litigation more proportionate and this recommendation was echoed by Lord Young in his report “Common Sense Common Safety”. The Bill already includes provisions to implement the other key elements of those recommendations. The referral fees ban under our new clause will complement the wider Jackson reform already in the Bill by further reducing the costs of personal injury litigation and deterring frivolous or unnecessary claims from being pursued in the courts.

The new clause creates a regulatory offence for any breach of the prohibition. It will be for the appropriate regulators, for example the Law Society, the Financial Services Authority or the claims management regulator, to enforce the prohibition. The regulators will also be responsible for taking appropriate action against regulated persons for any breaches. We have thought carefully about how to ensure that all the main players, including insurers, are captured by the ban, which is why there is a separate clause, new clause 20, giving the Treasury powers to make regulations allowing the FSA to enforce the ban under its existing regulatory powers.

There have been calls from some people, but not most people, for the payment and receipt of referral fees to be made a criminal offence. Not least among those who have called for that is the right hon. Member for Blackburn, who has tabled amendment (e) to that effect. We considered the matter carefully but believe that creating a criminal offence would be a very blunt instrument in this case. One would have to prove beyond reasonable doubt that consideration had changed hands for the referral of a potential claimant, but the grounds for determining whether something was or was not a referral fee could be blurred. It would be very difficult to convict in many cases on the basis of the complexity of those arrangements. That is why we consider a regulatory offence to be more appropriate, whereby the principle of what is happening can be looked at by the regulator and a view can be taken.

I am conscious that a criminal offence would impose additional costs on the police and the courts in investigating and enforcing a ban. I believe that a regulatory prohibition covering all the main players in the sector, including lawyers, claims management companies and insurers, is the most appropriate and effective response to the issue. I am confident that the industry regulators are best placed to investigate and enforce the regulatory ban.

[Sir Alan Beith]

As my hon. Friend has indicated, I strongly support the action he is taking, but is it not the case that in many of those circumstances a criminal offence may well have been committed by way of a breach of the Data Protection Act 1998? The problem then is that custodial sentences are not available for someone who is doing that on a large scale and making a great deal of money by releasing personal information and committing a criminal offence.

[Mr Djanogly]

My right hon. Friend makes a good point. It is not one that is covered by the Bill, but it is something that the Government are looking into, and I hope that there will be further developments on that in due course.

[Mr Straw]

I thank the Minister for the generous compliment he paid me, for which I am most grateful. There are plenty of situations relating to financial institutions in the widest sense when conduct might be the subject of a regulatory breach enforced by the regulators, but in more severe cases it could also be a criminal offence. It is a matter of belt and braces. Frankly, I do not understand why he is suggesting that those are alternatives when one complements the other.

[Mr Djanogly]

The reason is that criminalisation would be too blunt an instrument. If we take the example of the straight payment of a fee for a referral, I can see how straight criminalisation would work, but we should appreciate that when that was last banned in 2004 it was a weak provision through which a coach and horses could be driven. What if an insurance company provides insurance to a solicitor in payment for referrals, rather than a straight fee? What if a trade union gives its cheap work to a firm of solicitors in consideration for the solicitors getting its better work? What if a claims management company provides a variety of services to a solicitor in payment for a referral? The point I am making is that the circumstances could be very varied and complex and the straight criminal option would not be appropriate. It would be the principle that counts and it would have to be a regulator that looks to the principle.

We are primarily concerned with removing incentives under the current system with regard to personal injury claims, which is why we are banning referral fees in that area. However, the Lord Chancellor may in future extend by regulation the prohibition on referral fees to other types of claim and legal services and other providers of legal services should the need arise and if the case is made for such an extension.

[Kate Green]

Is the Minister not concerned that that might introduce an element of uncertainty? Although I note what he says about the possibility of extending the provisions to other structures in future, is he not aware that alternative business structures will now be set up by large companies to get around the provisions? How will he address that?

[Mr Djanogly]

Alternative business structures will be set up by the Solicitors Regulation Authority, probably before or just after the end of this year, so the hon. Lady makes an important point. At that stage, claims management companies will be able to purchase solicitors, and vice versa, which means that it would indeed be possible, as we discussed in the Transport Committee, for a claims management company to own a solicitor and effectively act as the advertising arm of a firm of solicitors. However, the important difference is that the claims management companies will then be regulated by the SRA, which will give consumers a significant amount of comfort.

Referral fees are one of the symptoms of the compensation culture in this country. The Government are determined to put an end to them while at the same time addressing the underlying cause of recoverability of no win, no fee success fees.

[Mr Andy Slaughter (Hammersmith) (Lab)]

Following what my right hon. Friend the shadow Secretary of State for Justice said earlier this afternoon, I rise to discuss proposals that have not been given due scrutiny in Parliament. We are all aware that the Government were bounced into taking action on referral fees only by the sustained campaigning by my right hon. Friend the Member for Blackburn (Mr Straw). In their haste to cover up their inaction and disregard of the abuses of the insurance industry, they have failed to consult on their proposals, which are incompetent, ineffective and will lead to problems further down the line. Indeed, it was reported this week that a judicial review has already been launched citing that lack of consultation.

Referral fees are paid by one party to another in exchange for what are essentially sale leads. They are analogous to brokers’ fees, commission for salespeople, marketing agreements or, in the most basic sense, advertising, because each of these represents part of the cost of sales. Every non-monopolistic industry has a cost of sales. Let me take the example of the insurance industry, an industry with which the Minister has more than a passing familiarity. Admiral is the UK’s leading specialist motor insurance company. Last year it received net insurance premium revenue of £288 million, but its total net revenue was £639 million, part of which was made with referral fees. It spent £151 million on the acquisition of insurance contracts and other marketing costs, including brokers’ costs, paying insurance websites and expensive advertising. Those costs drive up premium costs and the desire to make profit also drives up premium prices—Admiral made £283 million in profit last year on its net revenue of £639 million. That is how it works in the insurance industry.

It works in a similar way when law firms pay independent brokers, some of which are known as claims management companies, another area with which the Minister has more than a passing familiarity. They will pay referral fees in order to get leads for their practice. The lawyers often do this because, frankly, they are not very good at sales, marketing or advertising. However, the problems arise in the behaviour that that encourages. Although there are reputable and decent claims management companies out there that bring together those who want help with those who can provide it, there are also many claims farmers, often based overseas, that abuse the system, send unsolicited spam to people’s e-mail accounts and mobile phones and abuse their data.

It is right to deal with people who act in such a way, but the claims management regulator, which until a few weeks ago was the Minister, but which I understand is now the Secretary of State, has proven singularly unable to do so. An internal review of claims management regulation from the Ministry of Justice, dated 25 October 2011—just last week—states:

“It is evident that many of the more objectionable practices of Claims Management Companies such as cold calling in person, unauthorised marketing in hospitals and using exaggerated marketing claims have been reined in as a result of action taken under CMR.”

Nothing could make clearer what delusions have set in with claims management regulated by the Minister, because we all know from personal experience that the opposite is true and that such abuse is still out there at large and, if anything, is increasing. Our constituents are harassed by claims farmers, and their objectionable messages, but the Department that he has mismanaged for the past year and a half believes it is doing an excellent job. That is why we must take corrective action.

--- Later in debate ---

[Sir Alan Beith]

Like the hon. Member for North Durham (Mr Jones), I had coal mines in my constituency. There were three working mines there, and I saw evidence of the scandal that he described. It was absolutely dreadful in many ways. Today, I want to ask for clarification of the Government’s intentions in two areas. One relates to the broadening of this issue beyond personal injury. New clause 18 provides for the Lord Chancellor to make regulations specifying wider ranges of legal businesses. I hope that there is a clear intention on the Government’s part, probably involving consultation, to move on to all the sectors in which referral fees have the potential to distort or damage competition or to undermine the position of the consumer. I would like a clear indication that the Government are going to examine a number of other areas.

Secondly, the Minister was very helpful earlier on the question of custodial sentences for breaches of the Data Protection Act, and I hope that that means that the Government have moved on from their position of saying, “We’ll have to wait until the end of the Leveson inquiry.” That represented a complete misunderstanding of the situation. The question of custodial sentences for data protection offences is not primarily about the issues that have been raised in the Leveson inquiry about the media; it is about the everyday circumstances of our constituents whose personal information is abused by the organisations that hold it. That matter ought not to have to wait until the completion of an inquiry into a wider range of issues. I hope that the Minister’s earlier helpfulness will be repeated in implementing a measure on which the House has already decided—namely, that there should be a custodial penalty in such cases.

[Mr Djanogly]

We have had a good, far-ranging debate this afternoon. Given that another important debate needs to be completed by 8 o’clock, I am sorry to say that I shall have to make my way quickly through the points that have been raised. I am pleased to hear at least a grudging agreement in principle with our ban on referral fees from the hon. Member for Hammersmith (Mr Slaughter). I thank my right hon. Friend the Member for Carshalton and Wallington (Tom Brake) and all the other right hon. and hon. Members for their support for our desire to implement the ban. I am pleased that the debate today has been about how that should be done, not about whether it should be done.

The hon. Member for Hammersmith asked why we had not consulted on banning referral fees, and I can tell him that Lord Justice Jackson made 109 recommendations, and it would not have been practical to consult on them all at once. It also made good sense to await the outcome of the Legal Services Board’s work in this area. Many respondents to our consultation on implementing Lord Justice Jackson’s recommendations included their views on referral fees. Those views, along with the work undertaken by the LSB and the Transport Committee, have been carefully considered. The hon. Gentleman clearly raised some serious issues relating to the regulation of claims management companies, but they were not directly relevant to the Bill. I must point out that, in the past year, the Ministry of Justice has cancelled 349 authorisations of CMCs, whereas in the last year of the Labour Government, it cancelled only 35.

The hon. Member for North Durham (Mr Jones) asked a number of important questions. If he does not mind, I will write to him about those issues. I can say, however, that under the Compensation Act 2006, it is an offence to provide regulated claims management services unless authorised or exempt. The hon. Gentleman will not be surprised to learn that the exemption applies to trade unions, and that is part of the problem that he rightly highlighted. I was present at the debate that he held on that subject several years ago.

The hon. Member for Hammersmith covered several other matters, but he essentially spoke to tomorrow’s debate, and we will deal with those issues then. My right hon. Friend the Member for Carshalton and Wallington asked about some important aspects relating to the consumer. The Chairman of the Transport Select Committee, the hon. Member for Liverpool, Riverside (Mrs Ellman), rightly mentioned that share premiums had risen by 40% in the last year alone. This is of course a matter of concern, and we have discussed it with the Association of British Insurers. It has said that if the proposals are effected with the other changes to recoverability of success fees in after-the-event insurance, it would hope to see a fall in insurance premiums. I certainly hope that that is a credible position.

As I said at the outset, there is broad support across the House for a ban on referral fees, although there is some disagreement on how best to implement the ban. The right hon. Member for Blackburn (Mr Straw) spoke to his amendments with typical passion, but I would like to set out briefly why the Government cannot support them. Amendments (a) to (c) to new clause 18 seek to capture within the prohibition all arrangements to pay or receive referral fees, even when a payment has not yet been made. These amendments might have been tabled in support of his amendment to make the payment and receipt of referral fees a criminal offence. However, I am concerned that capturing an agreement to pay referral fees when payment might not have occurred would be very difficult to enforce. A solicitor’s accounts, for example, might well show that a particular payment had been made that could, on the face of it, be a referral fee. However, it is unlikely that agreements, which in some cases might be no more than verbal agreements, could be so readily identified without time-consuming investigation. In any event, we do not think that it is necessary to provide for this eventuality, first because such agreements would be unenforceable under subsection (6) of new clause 19 and, secondly, because whatever might be agreed, the payment of the referral fee would still be prohibited. So, in practice, it is unlikely that a party would enter into an agreement to pay a referral fee when payment would be a breach of the prohibition and the agreement would not be enforceable.

I have already dealt, in moving the new clause, with the arguments against amendment (e), which seeks to create a new criminal offence. I should just reiterate that the Government are fully committed to ensuring that the ban will work effectively.

[Mr Straw]

When I made my point about the banning of referral fees being backed by the criminal law, the Lord Chancellor did not say that he agreed with me, but he did say, on 13 September:

“We are now considering the way in which to put this into practice, but it is likely to be in the form recommended”—[Official Report, 13 September 2011; Vol. 532, c. 879.]

—that is, a criminal prohibition as well as a regulatory one. He appeared to have an open mind about that, so what has changed since then?

[Mr Djanogly]

I have just confirmed with my right hon. Friend the Lord Chancellor that, in the next sentence of that quote, he said that he had not committed to creating a criminal offence.

I can assure the right hon. Member for Blackburn that we have thought long and hard about how to achieve this, and I am aware of the concerns raised in the Justice Committee’s recent report on referral fees and the theft of personal data. The Committee’s Chairman made the point again today that the penalties for breaching section 55 of the Data Protection Act were not sufficient. The Government are keeping the question of whether to introduce custodial penalties for section 55 offences under review, and we will respond to the Justice Committee’s report in due course. However, the issue of how to deal with people such as rogue motor garage workers or nurses who are breaking the law by breaching the Data Protection Act is separate from that of how to introduce a new ban on regulated bodies to prevent them from paying referral fees, which they are currently permitted to do. I strongly believe that our ban, which will stop lawyers, claims management companies and insurance companies from paying and receiving referral fees, will remove the incentives for selling personal data from the whole system. That is because there will be no one for the rogue garage, for instance, to sell the data to, as all the people in the system who can make any profit out of handling claims will be prevented from paying referral fees. My hon. Friend the Member for East Hampshire (Damian Hinds) well set out the complexity involved in this instance.