The Direct Line Group will shortly make an application to become an alternative business structure (ABS), with the referral fee ban set to choke off a source of income that has raised £110m over the past three and a half years, it has emerged.
In the prospectus for its upcoming stock market float, the company – whose brands include Direct Line, Churchill and Privilege – said: “The group is currently considering participating in an alternative business structure as a potential measure to improve efficiencies relating to legal expenses, and currently expects to make the relevant application under the Legal Services Act in the second half of 2012 as part of this process.”
In what is the most open accounting of an insurance company’s referral fee income to date, the prospectus revealed that the company made £31m from solicitor referral fees in 2009, £39.4m in 2010, £27.9m in 2011 and, in the first six months of 2012, £11m.
Direct Line made a further £50m in the past two and a half years from credit hire referral fees.
However, Direct Line said that as a whole, the package of civil justice reforms that includes the referral fee ban should not hit its bottom line: “Taken together, the group currently believes that these proposed reforms, if implemented in a coordinated manner, should have a broadly neutral effect on the results of the group in the medium term although the short-term impact of some reforms (such as the banning of referral fees) may have an adverse effect on the group’s results before the benefits of other reforms (such as reduction in fixed legal fees) are realised by the group.”
A spokesman for Direct Line Group said: “In light of possible regulatory changes to remove dysfunctionality from the UK motor insurance market, which we support, we are looking at a variety of options including legal services to ensure we are able to sustain our competitiveness and continue to offer customers choice, and great value and service.”
Our sister site Litigation Futures separately reports on what financial impact the Court of Appeal ruling in Simmons v Castle, on next year's 10% increase in general damages, as well as a change to the discount rate, will have on the Direct Line Group. Click here.