CMCs warned over major ABS hitch amid call to close referral fee ban "loophole"

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By Legal Futures

31 October 2011

West: reduction in fixed fees is necessary alongside referral fee ban

Claims management companies (CMCs) looking to create legal arms as alternative business structures could fall foul of Solicitors Regulation Authority (SRA) rules, a former director of the SRA has warned.

Meanwhile, a leading defendant lawyer has expressed concern over the “significant loophole” in the government’s proposed ban on referral fees in personal injury.

, Alison Crawley – who spent 22 years at the SRA/Law Society, including as director of compliance – says the separate business rule could cause a serious problem for those CMCs which are planning to start their ABS plans by acquiring or merging with one or more of their current panel firms, and running it as a separate subsidiary regulated by the SRA, while the CMC continues to be regulated by the Ministry of Justice.

She explains that a business cannot hive off ‘core’ legal services, which have a wider definition than reserved legal activities, including the conduct of litigation.

“What does this mean for a CMC thinking of buying one of its panel law firms? It means that the CMC holding company, which does not want to be regulated as an ABS but simply to own one, cannot provide any services that could be the conduct of litigation – typically the preparatory work on investigating the claim to the stage when it is ready to be assessed and taken on by a panel firm.

“This could mean that the most sensible business model for some is not permitted.”

Meanwhile, the Legal Aid, Sentencing and Punishment of Offenders Bill will go through its report stage and third reading in the House of Commons over the next three days, including debate over amendments published last week to introduce the ban on referral fees.

As reported on Legal Futures, these include a get-out if the payment is made “as consideration for the provision of services”.

Richard West, head of the liability division at City insurance firm Kennedys, said this could allow a law firm to pay to ‘receive’ services in return for cases.

“Such firms would therefore receive ‘for free’ the claimant injury cases, thus exploiting the current loophole,” he said.

Services which might be used as ‘payment’ include training, risk management assistance, commercial expertise and business consultancy from those referring the work, he said.

The firm could also make significant payments towards a referrer’s marketing costs, or provide funds for the running of a jointly owned alternative business structure.

The amendments grant the Lord Chancellor power to make regulations setting the maximum amounts for such payments, above which they would be treated as referral fees; Mr West said it is important for the government to do this and clarify the limit of “paid-for services”.

They should be set along lines that are “proportionate to the service being paid for, for example, by reference to the usual commercial rate”, he argued.

He said he was also disappointed that the amendments do not recommend reducing the current level of fixed costs in many fast-track road traffic claims. “We maintain that a reduction is necessary in combination with referral fee ban,” he said.

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