Costs reform? ABSs are the big picture here

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30 March 2011

Process-driven: new system for running claims will appeal to ABSs

Posted by Neil Rose, Editor, Legal Futures

In truth there were no great surprises in the litigation costs announcements yesterday. The claimant lobbying effort has been significant but apparently to no avail and as generally expected Lord Justice Jackson will see his recommendations implemented.

There were a few points of greater interest in the county court reform consultation, notably the introduction of “pre-action dispute management”, the tripling of the small claims limit and the big mediation push. One cannot help but wonder if a national county court service is a pre-cursor to more court closures.

Extending the road traffic claims process had been flagged up before, but justice minister Jonathan Djanogly wisely stepped back from last year’s green paper ambition of doing it in April 2012, given our story earlier this week that such a deadline simply cannot be met from a technical point of view.

So, what does it all mean for claimant personal injury (PI) lawyers? I suspect the Ministry of Justice is right when it predicts that law firms will adapt. They always do, even if it means profitability might fall.

The ministry’s impact assessments also sound about right – more process-driven work should require less resource (and lower-level resource at that); earlier settlements will reduce the amount of work for lawyers to do; and staged payments, as the positive flipside of fixed fees (which are inevitably lower than previous fee levels), have already given a very welcome cash-flow boost to those working under the current claims process. The prediction that they will move into other areas of work to compensate is on the woolly side, shall we say.

The shadow looming large here is alternative business structures (ABSs). All this is the kind of language that shouts ABSs. With many hundreds of thousands of cases a year, it is with good reason that PI has long been seen as one of the early targets of ABSs. This may be from new entrants to the market or existing claims management companies (CMCs). Fixed fees means firms need strict controls on the way they do this work.

For the larger CMCs, the logic is near irresistible for both positive and negative reasons. Last year I visited one major CMC and was very struck by just how much work they do on a claim before handing it over, all neatly packaged, to the panel solicitor. It seemed little more than a small skip and a jump for firms like that to do the legal work too – especially as turning claims into a smooth process is what they do – and pocketing all the fee, not just the referral fee.

The negative reasons are the likely pressure on the level of referral fees as a result of these reforms (and continuing vocal opposition to the very principle of them) and the never-ending bad press about CMCs and the compensation culture. Yesterday Jack Straw, in calling for his successor to ban CMCs, expressed regret that he hadn’t done so himself when Lord Chancellor. Ken Clarke conspicuously failed to answer the question, perhaps realising that the option of becoming ABSs means there is not much the government can do to halt CMCs (although the option of curbing advertising remains). Equally CMC ABSs will render the referral fee debate moot too.

Away from CMCs, other aspects of the broader Jackson reforms might appeal to ABSs – the growth of third-party funding (a funder investing in a law firm to handle cases?) and opportunities arising from the introduction of contingency fees being two. You could even combine them and see a funder invest in a law firm to handle high-volume PI cases on a contingency fee basis, with the funder taking the hit on those cases that lose.

Don’t forget legal process outsourcing too – some providers are already, albeit quietly, doing PI work and the need to squeeze profit out of a fixed fee could push firms down this route.

The message here is that law firms working out what yesterday’s announcement means for their business models should not lose sight of this bigger picture. Ultimately it might be ABSs which determine whether they have a future, not Lord Justice Jackson.

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