The government is to ban referral fees for personal injury (PI) work, it announced today.
However, it has no plans to take action on referral fees paid to estate agents for conveyancing.
The Ministry of Justice (MoJ) said referral fees in PI “have led to high costs, encouraged a compensation culture and led to the growth of an industry which pursues claimants for profit”.
This feeds through to higher insurance premiums, it argued, “unnecessarily forcing up the cost of living”.
The current intention is for a regulatory offence, which will be enforced by the relevant regulators. The timing has not yet been finalised, but the hope is to add it to the Legal Aid, Sentencing and Punishment of Offenders Bill, currently going through Parliament. Justice minister Jonathan Djanogly said on the Today programme this morning that if this happens, the ban could be in place by Easter.
However, there is no guarantee it will be allowed to do this for reasons of parliamentary procedure, and failing that Legal Futures understands the ministry would seek to introduce the ban directly through the regulators.
Following introduction of the ban, the MoJ said it will consider “what changes may be necessary to the fixed amount of costs” recovered under the road traffic accident portal and predictable costs scheme for cases worth £10,000 or less.
Mr Djanogly described referral fees as “one symptom of the compensation culture problem and too much money sloshing through the system”.
He restated the government’s commitment to pushing ahead with the Jackson reforms, contained in the bill, despite the voices of opposition to them. They will “end the bizarre situation in which people have no stake in the legal costs their cases bring”, he said. Lord Justice Jackson also recommended banning referral fees.
On conveyancing, earlier this week in a written reply to a question in Parliament, Mr Djanogly said the government is “not currently pursuing further work specifically in relation to referral fees and estate agents”.
Speaking before news of the PI ban broke, Law Society chief executive Des Hudson said the approach on conveyancing is “short-sighted and does not recognise the clear potential for consumer detriment that exists in respect of the most important transaction most people make in their lives – buying or selling a house”.
He said the society has written to the Department for Business, Innovation & Skills asking it to reconsider this move “and will be pressing the government to include a general prohibition on referral fees throughout the legal sector”.
Deborah Evans, the chief executive of the Association of Personal Injury Lawyers, said that while most solicitors have reservations about referral fees, “it’s difficult to see how they can be banned without simply being driven underground, where we know from past experience that chaos and lack of transparency for consumers will be the inevitable outcome”.
She argued that the MoJ should tackle “the real problems in the system”, such as by banning the practice of passing on of injured people’s private details without their express consent, tighter regulation of advertising and “a strict and consistent ban on cold calling”, which would include defendant insurers approaching injured people.
The MoJ announcement came as the Claims Standards Council and Access to Justice Action Group outlined a series of measures aimed at tackling abuses in the claims system.
These include introducing powers to disconnect numbers from which unsolicited text messages are sent; an end to cold calling; a ban on financial inducements in advertising just to make a claim; and making insurers who refer claimants to solicitors register as claims managers.
On referral fees, AJAG said the claims regulator should have the power to require a claims management company or liability insurer “to justify either their referral fee structure or the fee in a particular case, in response to a complaint”.
Yesterday the Office of Fair Trading issued a call for evidence on the motor insurance sector, with a particular focus on whether and why premiums are rising, but said that because of the MoJ’s work, the cost of PI claims will “not be a focus of our evidence gathering”. It was pressure from the Office of Fair Trading that persuaded the Law Society to lift the ban on referral fees in 2004.