Government will not set limit on payments permitted under referral fee ban exception

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23 November 2012


Referral fees: CMCs will need to rethink their businesses, regulator warns

The government is not currently planning to set an upper limit on payments that are exempt from the referral fee ban as “consideration for services”, it has announced.

The news came as the Claims Management Regulator (CMR) outlined the kinds of activities claims management companies (CMC) should still be able to undertake after April 2013.

Section 57(8) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 provides an exception to the referral fee ban where the regulated person can show that the payment was made as consideration for the provision of services. Section 57(9) allows the Lord Chancellor to set a limit above which any payment that would otherwise be within this exception will still be treated as a referral fee.

However, in a civil costs reform update published this week, the Ministry of Justice said it is not intending to make any regulations under section 57(9) for April, “but will keep the matter under review thereafter”.

In the first statement of its approach to the ban, the CMR said it will be for CMCs to show their businesses comply with the ban if requested. Though further guidance will be developed to help businesses assess their compliance, “we will not provide practical examples of what will be compliant with the ban”.

The regulator said that 46% of the 3,000 CMCs that currently operate in the personal injury sector have a turnover of under £26,000 and are small businesses that often provide claims management services in conjunction with related business activities, such as vehicle recovery, repair, storage and hire.

“The claims management services that are undertaken follow the simple ‘referral of information to another CMC or solicitor for a fee’ model. As this model will be in breach of the ban, it will be necessary for these CMCs to review their current business model and make any adjustments to ensure that it will comply with the referral fee ban post 1 April 2013.

“The smaller businesses sometimes operate within networks of associated businesses, including medical examiners, solicitors, independent vehicle examiners, and independent referrers (usually exempt introducers). However, by contrast, there are also some large businesses that market their services on a regional or national scale and refer a high-volume of cases to solicitors.

“The ban has the potential to cause a reduction in the income levels of the sector and may impact upon the number of CMCs who wish to remain in the market. This will be dependent on the current reliance on referral fee income, the availability of alternative income streams, the flexibility of CMCs’ businesses models and the viability of revised models.”

However, the CMR said the ban will not prevent CMCs from undertaking other regulated claims management activities, such as advertising for claims, and investigating and advising in relation to claims. “It will be for those CMCs to review their current business model and identify whether it is compliant with the ban, and where necessary make changes.”

The CMR said it will monitor compliance by making requests for information, completing paperwork audits, routine audits and other methods that are currently used to ensure compliance with its conduct rules. It will also undertake a “strategic assessment” to inform enforcement once the ban is implemented.

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