Two sides of the referral fee coin

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6 June 2011


Posted by Neil Rose, Editor, Legal Futures 

Buy, buy, buy: analyst advises to buy insurer's shares in wake of referral fee decision

Reaction to the Legal Services Board’s decision document on referral fees has been predictable. The Law Society and Bar Council were deeply unhappy, as was the Association of British Insurers (ABI – not an organisation with which Chancery Lane often makes common cause). 

Nick Starling, the ABI’s director of general insurance and health, said: “We are disappointed but not surprised by the Legal Services Board’s decision that overwhelmingly favours lawyers. Making referral fees more transparent, as the report recommends, will not stem the growth in the compensation culture or frivolous and exaggerated claims which the practice encourages. This is why they should be banned.” 

He said the government’s reforms to civil justice costs will only succeed if referral fees are banned. “Insurers now look towards Parliament to take the necessary steps and ensure a full ban, which is the only way to protect consumers.” 

Many insurers, of course, are in a slightly difficult position when it comes to referral fees – while the liability side is paying out costs to claimant solicitors, which insurers say are inflated to accommodate referral fees, the “claimant” arms of insurers’ businesses are themselves selling off cases to panel firms. 

One assumes insurers have done the calculation that they would save more from a referral fee ban and forcing down the level of claimant solicitors’ fees as a result, than they make from referral fees at the moment. 

But that is a blanket statement, of course, and so it was very interesting to read in the Guardian last week that Collins Stewart has advised investors to buy Admiral Insurance in the wake of the LSB’s decision. 

It quoted the analysts as saying: “[We] see last week’s news as supportive for the investment case, as it removes what for us was a key short-term concern. Admiral does not break out how much referral fees contribute to ancillary income, but ancillary fees in total are a key profit contributor.” 

Admiral, the paper goes on to explain, is an unusually profitable insurer. 

This is what Admiral said to me about referral fees in a statement: “We don’t break down our ancillary income as we’re not required to and it is information our competitors could use. Referral fees are included in our ancillary income but are only one element alongside legal cover, personal accident cover, car hire, breakdown insurance and administration fees among other things.  

“Our view is a simple one. When our customers have been in an accident, they want to resolve their situation as quickly and as simply as possible. Helping them get in touch with legal assistance is part of that process. At Admiral we will continue to do our best for our customers in these circumstances and we will work within whatever guidelines we are given.” 

I can hear the naysayers shouting at the screen that Admiral does not need to charge a referral fee to put its customers “in touch with legal assistance”. Maybe not, but that’s the realpolitik of where we are today. 

I also had it suggested to me last week that so long as referral fees exist, insurers will be reluctant to become alternative business structures so as to capture the legal work of a claim. Yes, they could make more money, but it would be a lot of effort – with all the extra regulation involved – for the purposes of bringing in another £100-150 a claim when at the moment the cash they make from referral fees is easy and goes straight to the bottom line. At the same time, an extra £100 could be a lot when you are talking about the kind of volume some of these insurers handle. 

The insurance industry has been banging the drum for a referral fee ban for many years and there is no doubting its commitment to the cause. But, as ever, these issues are not as black and white as they may seem.

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