Djanogly: paying referral fees to be a regulatory offence

Djanogly: criminal offence is a blunt instrument

The ban on referral fees will not be a criminal offence and is to be enforced by the legal profession’s regulators instead, justice minister Jonathan Djanogly announced yesterday.

He also revealed that the Ministry of Justice (MoJ) has “initiated the process” of reducing the £1,200 payable to solicitors under the RTA portal to reflect the ban, and said claims management companies (CMCs) becoming alternative business structures (ABSs) because of the ban would be a good thing.

As we predicted yesterday, Mr Djanogly told the transport select committee – which is investigating the cost of motor insurance – that the MoJ has “veered away from a criminal offence”, which he described as a “very blunt instrument”.

He observed that there are “many ways to get round a straightforward referral fee” – such as insurance company giving solicitors work in return for them taking out insurance with that company; trade unions referring work to solicitors in return for the law firm handling the low-value matters for free; and solicitors paying for “services”, rather than a referral fee.

A criminal offence would have to be proven beyond reasonable doubt and “it would be very difficult for a jury to convict on the basis of the complexity of these arrangements”, Mr Djanogly said.

By contrast a regulatory offence – enforced by the Solicitors Regulation Authority and others – would mean “the principle of what’s happening can be looked at… and a view taken”.

The minister said he had told the Law Society that “it is not the government’s intention to stop referral fees going to claims management companies just so the lawyers can take those referral fees effectively for themselves”. Though he said the process of reducing fees from the portal has begun, he acknowledged it was “not straightforward… there’s going to be a negotiation there”.

Mr Djanogly said the Civil Justice Council – which brokered the deal on the current level of fees – “may have a role in this again”.

He predicted that a “significant number” of CMCs will look to tie up with law firms under ABSs as a result of the ban. From a regulatory point of view “this will be very advantageous”, he said, as they would then be regulated by the Solicitors Regulation Authority. “This would be a very significant movement in favour of consumer protection.”

The minister also revealed that the MoJ has agreed with mobile phone network operators that they will provide information to identify the source of text messages encouraging people to claim, although he pointed out that it is “not all necessarily illegal” because insurers’ customers may consent to it in the small print of their policies.

In the preceding evidence session, Paul Evans, group chief executive of AXA – which stopped charging referral fees in June after Jack Straw began his campaign against them – promised that car premiums would fall if referral fees are banned.

However, he confessed that the company still receives referral fees from credit hire companies – which he said were of a far lower magnitude than personal injury referral fees and that the insurance industry is trying to sort out credit hire costs on its own.

Also giving evidence, Mr Straw said that the Compensation Act 2006 – which created regulation for CMCs and for which he was later responsible as justice secretary – has not worked effectively. Describing CMCs as “parasitic”, he said: “These people are verging on the criminal. In any other walk of life we would describe the whole racket of referral fees as bribery… There are plenty of dodgy solicitors’ firms that are part of this racket.”


    Readers Comments

  • Djanogly admits then that he spoke first, thought later on referral fees. Now he wants to reduce the solicitor’s income from RTA claims. I bet those that don’t pay referral fees, and choose instead to do their own marketing, will be thrilled about that. All goes to restricting consumer knowledge and therefore claims. Anyone would think he had an interest in that. He also confesses that he doesn’t believe that his own ministry is competent to carry out the regulatory role entrusted to them.

    Axa now admit that they have only stopped taking one sort of referral fee. They must have muttered that quietly when they announced their decision to come clean on the subject..

    And dear old Mr Straw, does he think that insurance brokers who rake in a percentage of the premiums they sell for insurers are parasitic? I can’t see how that process is any different from a CMC’s referral fee, it’s simply another form of outsourced marketing.

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