The impending ban on referral fees in personal injury (PI) could result in a “steep increase” in the number of financial failures amongst small law firms – and may not actually discourage spurious claims – the Solicitors Regulation Authority (SRA) has warned.
The SRA has also identified deciding whether a payment is for the referral – particularly when made for advertising – as a particular problem it will have to wrestle with once the ban is introduced next April.
Further, it will not seek to stop alternative business structures (ABSs) being formed between solicitors and claims management companies (CMCs) so as to avoid being caught by the ban.
In a discussion document on how it will enforce the ban, published today, the SRA said that a quarter of all solicitors’ firms conduct PI work and it is worth approximately £1.8bn a year to the profession, 7% of the total estimated market value in 2011.
Its preliminary risk analysis established that the north-west is a PI hotspot, while a significant number of small firms across the rest of the country do relatively small amounts of PI work, with a large number of small CMCs referring to single local firms, or small local networks.
It said: “It is possible that it is in these areas that the most change could occur as large law firms look to pick up client leads from these existing small networks that are not able to respond to the coming ban. It is also possible that fierce competition could bring new ethical and compliance issues that require intensive regulation.
“If it is the smaller end of the PI market that suffers as a result of changes in the market, it is possible that even for small firms who do not do significant amounts of this work, the potential loss of revenues could add to the cumulative effect of difficult economic conditions, difficulties in maintaining adequate levels of bank financing and the impact of loss of other revenue through the continued stagnation in the housing market. The result could be a steep increase in the number of financial failures amongst small firms.”
The Legal Aid, Sentencing and Punishment of Offenders Act 2012, which contains the ban, says that if the regulated person paying or receiving the fee can provide it was for the provision of a particular service or for some other reason, and not the referral of a claim, then it will not be caught.
The discussion document said this is the difficult part of the new law, “particularly where the introducer is providing services to the solicitor, such as marketing, vetting of claims or other claims management activities. This is likely to involve assessing what is a reasonable amount to pay for any services that may be offered by an introducer and is likely to involve detailed investigation. In any event we will be looking to ensure that firms arrangements are transparent”.
The SRA said it is “relatively clear” that arrangements in which potential clients are given information to enable them to contact a suitable solicitor will not be caught by the ban (although it would be for the purposes of the Solicitors Code of Conduct). By contrast, any situation in which a third party, such as an insurance company, simply passes on details of someone known to have suffered an accident to a solicitor, in return for a fee, will be caught, it said.
“Any arrangement that involves advertising is likely to be problematic. It is not the government’s intention to prevent joint advertising by groups of solicitors, i.e. where solicitors pool their marketing resources to conduct an advertising campaign and enquiries are distributed amongst contributing firms. However, many CMCs may legitimately argue that they are carrying out marketing for groups of firms and that they are not caught by the ban.
“Such activities may be under particular scrutiny as we will want to ensure that they are not being used to avoid the ban. One of the government’s expressed aims is to reduce activities that actively encourage people to make unnecessary or spurious claims when they might not otherwise have done so. However, it is possible that the ban will not lead to this outcome because of the difficulty in definitions.”
On ABSs, the document said that provided that all of the requirements for authorisation are met, and the ABS complies with all of its regulatory obligations, “we cannot seek to prevent such arrangements simply because they are set up to avoid being caught by the ban. An ABS is a legitimate form of business, supported by a strong statutory and regulatory framework.
“We may however impose conditions on the licence of an ABS, or even refuse authorisation, if we think the arrangements pose a threat to the public interest or the regulatory objectives.”
The SRA said that its outcomes-focused approach will allow it to look at the substance of an arrangement, rather than just its form, to ensure that they are not just engineered to get around the ban. It is set to introduce a set of mandatory outcomes and non-mandatory indicative behaviours which reflect the provisions and purpose of the Act.
Interested parties have only seven weeks to respond to the document, with the SRA saying it is not part of the formal consultation process on its proposals that will come later this year, and that the time for implementation of the Act is short.