Banning referral fees will have “no effect on legal costs” and instead make something that is “currently reasonably transparent into something totally opaque”, the architect of the claims management regime has warned MPs.
Mark Boleat, a member of the government’s regulatory policy committee and former head of claims management regulation at the Ministry of Justice, said the government should allow the other Jackson reforms to cut “the fat in the system” and so reduce the scope of solicitors to pay acquisition costs, “whether by advertising, paying referral fees or any other means”.
In supplementary written evidence to the transport select committee, which is investigating the cost of motor insurance and has spoken out against the “merry-go-round” of referral fees, Mr Boleat argued that “the chance of someone seeking to make a claim for, say, £4,000 finding a suitable lawyer on their own is very small”.
He added that there is also no guarantee that the business coming directly to a solicitor automatically means the solicitor is acting in the best interests of the client and is independent. “Solicitors are in business to make money, and the extent to which they will make money on particular cases inevitably influences their willingness to take on those cases.”
Mr Boleat, one-time chief executive of the Association of British Insurers, said solicitors need an “effective marketing campaign” to source low-level personal injury cases; relying on an entry on the Association of Personal Injury Lawyers website and in the Yellow Pages “will get very little, if any, business”.
He continued: “By using introducers, solicitors are merely outsourcing part of what they would otherwise have to do themselves. Outsourcing itself does not threaten a solicitor’s ability to act independently, or in the best interests of the client any more than where work is done in-house.
“For example, a small solicitors’ practice wholly reliant on personal injury work is itself vulnerable for this reason. Similarly, solicitors wholly reliant on conveyancing are vulnerable if there is a downturn in the housing market, which may cause them to move into other areas of business in which they are not really competent.”
Mr Boleat predicted that if referral fees are banned, solicitors – individually or collectively – will acquire claims management companies or employ claims farmers directly; solicitors will increase their own marketing spend; and when alternative business structures are introduced, the larger claims management businesses will acquire solicitors.
Further, referral fees would continue to be paid “but suitably disguised” – as he said happened when they were previously banned. “For example, a solicitor would pay for advertising in a car hire business, but the advertising charge would be paid only in those months when a set number of referrals had been made.”