Survey: personal injury law firms face financial meltdown

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13 March 2013

Wallis: high level of stress on PI firms

Nearly a fifth of the north-west’s specialist personal injury law firms are considering shutting up shop due to the financial impact of the government’s civil costs reforms, with many predicting huge cuts in their profitability as a result of the new RTA portal fees, new research has revealed.

The poll by Liverpool law firm O’Connors – which specialises in advising other legal practices – also found relatively little appetite among solicitors to become alternative business structures (ABSs) and buy up claims management companies.

Just over six in ten (62%) of the 300 firms surveyed currently pay referral fees, and 68% of them said they intend to continue doing business with their referrers after the ban comes into force on 1 April.

According to the survey, conducted last week, 71% of managing partners are actively trying to re-structure arrangements so that cases are self-referred by potential claimants on the recommendation of the referrer in the hope that this will avoid the ban.

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More than half (53%) were planning to increase their own direct marketing spend to attract new clients, rather than buying them in. Earlier research by the firm indicates that the net cost is about the same.

Other options being considered included paying a referrer for marketing services (43%), paying a referrer for legal support services (33%) and joining a ‘not for profit’ marketing collective (33%).

However, as many are considering ceasing to trade and running off cases as are planning to become an ABS – 19%. Less than 10% of firms expect to acquire a referrer to bring marketing in-house.

Most of the firms polled handle portal work, and more than half of them expected profitability will drop by 40-60%, with nearly one in ten believing it will drop by as much as 80%. The impact of the extension of the portal to employer’s and public liability cases would not be quite as bad, the survey suggested, although the majority expect to see profits fall by 20-50%.

The anticipated fall in firm profitability has also made a third of those planning to bring work referrers into their ABS rethink the idea, O’Connors reported.

To make matters worse, an overwhelming 85% of respondents said the annual cost of regulatory compliance is increasing.

The survey indicated that if the firms were to seek external advice on how to respond to these challenges, they would go to other law firms or law firm consultants; they were even more likely to ask the Solicitors Regulation Authority than an accountant or their bank manager.

O’Connors’ partner Nigel Wallis said: “This survey shows the high level of stress on this important sector of the legal economy which employs tens of thousands of people in the north-west and provides access to justice to many thousands of accident victims every year. We are working with many of these law firms helping them to find a way forward and, sadly, the findings support the stories we hear from managing partners almost on a daily basis.”

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