The case for Referral Fees – submission to the Legal Services Board

20/01/2010

This week the Legal Services Consumer Panel asked the CSC to attend a roundtable discussion on referral arrangements and to assist with their call for evidence.

The timing of this roundtable could not be better on the back of Lord Justice Jackson’s final report, which was published last Thursday, and which, amongst other things, has suggested that referral fees be abolished or at the very most allow an amount of £200 – a figure we now know may as well have been made up!!!
A copy of the scope document and key areas of interest is attached.

We intend to respond to the consumer panel call and to provide the most current evidence available to us. To be able to do that, we need your assistance and we hope you will be able to find the time to help us.

The current CSC view is below and we would be grateful if you could review this and add anything you think will help in our submission.

Please send your thoughts to submissions@claimscouncil.org

Thank you for your assistance.

Darren Werth
Chairman

To put the whole referral fees issue into context it is worth summarising the position of referral fees since the Access to Justice Act 1999. The summary would read something like this:

1999- Access to Justice Act- referral fees not allowed hence convoluted business models meaning back-door referral fees, the rise of Claims Direct and The Accident Group, malpractice, grossly inflated ATE premiums all of which led to satellite litigation, technical challenges and an industry meltdown.

2004- change in the Solicitors Referral Code- simplification of new business models through transparency with minimal interference with the solicitors, which has resulted in the most stable period that the personal injury industry has enjoyed for a long time and increased access to justice for the man in the street. A true watershed for the industry.

The Jackson future- a return to underground practices that will result in a return to the malpractices and hence technical challenges and instability within the marketplace. A future not in line with a modern commercial world in which we all live and work. Basically a notion of legislating against market forces!

So the biggest question of all is “What is a referral fee”?

The answer to this depends very much upon terminology, which is a very dangerous thing – referral fees, acquisition costs, marketing fees, introduction fees etc. The term referral fee seems to be used by certain people to imply an evil and unusual action specific to the world of personal injury claims – in other words it’s almost become a mythical expression used to deliberately and unfairly single out CMCs. Most people think of 1 guy running around a shopping centre with a mobile phone trying to acquire a couple of PI leads whereas you need to be thinking in terms of large marketing companies who have specific skill-sets.

It is the year 2010! Solicitors are business people who aren’t in this marketplace just to help people but they are business men and women looking to be commercially successful. The fact of the matter is they all operate within a free, open, commercial market where those who are successful will survive and those who are unsuccessful will fall by the wayside. Believing that you can operate a law firm based solely upon members of the public finding you through the APIL or MASS web-sites (which no member of the public would ever have heard of) or by walk-ins off the street will almost certainly result in failure. So you outsource to the most cost effective provider, which in all likelihood would be a CMC.

So the question is how or where do you get business from? Any other business in any other field that had goods or services on offer to the public would advertise its offers to attract the public so why not in the personal injury?

With the millions and millions of pounds being spent by CMCs and solicitor collectives alike the public are now not only aware of their right to redress, but also of the choices they have – whether that be to go through a CMC or go directly to a firm of solicitors, or to perform their own research on the web. So in practice the referral fee part of the personal injury market has actually performed a public service by empowering the public and giving them choices in the absence of any state funded campaign.

A solicitor running his own practice and who has a budget which he hopes will allow him to attract members of the public has several options:

â Direct advertising, nationally or locally.
â Advertising through collective arrangement with other solicitors, such as Injury Lawyers 4U or National Accident Helpline.
â Employing “business development managers” whose task is to get business through making and exploiting relevant contacts.
â Paying fees to businesses that are able to introduce cases, having used one or more of these methods more economically.

Where a solicitor works for fixed fees (as are used in RTAs and will no doubt become more wide-spread for other types of fast track cases), whose business is it other than the solicitor’s to decide what percentage of those gross costs he wishes to apportion to the acquisition of cases? Surely in a free marketplace where the solicitor is able to decide the level of acquisition cost he is comfortable with, and is under no contractual obligation to take work at an unreasonable level, suppliers will survive or fail depending upon the reasonableness of the cost of the cases they are offering- in other words in a free market the price for acquisition of work will naturally find its own level.

No-one can argue that referral fees have to be fair, reasonable and proportionate as well as transparent- otherwise why take that work from those referrers- so on that basis what are some of the benefits of referral fees?

1. They promote access to justice. This is achieved by claims management companies increasing awareness of the right of those who have suffered accidents to claim compensation and by facilitating the claims process. They provide the marketing and case management skills that are essential in any consumer-facing service industry where the product is opaque and most people use the service only once.

2. They provide business to solicitors. Solicitors can obtain personal injury claims only if their service is marketed, directly, by marketing agencies acting on their behalf or by a claims management company. Referral fees are a marketing cost in the same way as direct advertising or the costs of employing business development managers. People respond to advertising and other marketing – which is why it is done! Abolishing referral fees would have no effect on marketing costs; it would merely change their composition. In practice referral fees, in a disguised form, would continue to be paid – as they were before they were formally permitted.

3. They provide the public with a choice. Without them there would be far less competition in the market place with only the larger firms surviving and thereby limiting consumer choice.

4. They allow BTE premiums to remain at the level they are at. The premiums would undoubtedly increase without the contribution that referral fees make to the BTE insurers.

Paying a referral fee isn’t compulsory – it is purely an option. Solicitors are not forced to pay referral fees but choose to do so.
It is therefore ridiculous to single out referral fees as some sort of “problem” and even to talk about abolishing them in isolation. In the commercial world of 2010 there can be no logic in banning referral fees, which are largely used to pay for advertising and preliminary processing, and allowing a solicitor to incur such costs directly. The SRA has itself recognised this and has ruled out banning referral fees. In fact a firm that has £200,000 for example to spend on acquiring business would spend the same £200,000 (less efficiently) still trying to acquire business should referral fees end up being abolished- only in some disguised way.

Jackson’s view

1. He believes that referral fees do not provide access to justice and that anyone with a claim will find their way to a solicitor. He fails to recognise the millions that companies like AAH, NAH, IL4U have all spent on promoting access to justice. There has been no government-funded awareness campaign.

2. His report focuses on PI only- what about financial mis-selling campaigns or other areas of law such as conveyancing?

3. He believes that referral fees are substantially higher than normal marketing costs but if they were wouldn’t a solicitor market for it himself?

4. He believes that referral fees drive up marketing costs and that if CMCs weren’t around then solicitors would be able to buy advertising space cheaper than they can now- utter nonsense. In fact CMCs’ bulk buying creates huge economies of scale that allows all parties to be able to benefit in cheaper advertising.

5. He ignores the fact that referral fees give businesses certainty and allow them to manage their growth and expansion as well as allowing new entrants into the market.

6. He strangely believes that clients get a bad deal because they simply get matched to the highest paying firm (rather than by geography or specialisation as is the case) but believes the profession will succeed on who offers the cheapest deal to the client – how does that correlate to level of service?

7. £200 fallback position which it appears is based upon absolutely nothing- if you could generate a PI claim for £200 we wouldn’t be having a debate on the subject!

8. He had chosen to ignore the OFT’s view of promotion of competition. Essentially he seems to want to prevent outsourcing- what’s next, not being able to outsource a function to a call centre in India?

9. He believes in the promotion of BTE but hasn’t worked out that without the element of referral fee the cost of BTE would have to significantly rise which in turn would mean its take up would be substantially reduced.

10. Has failed to take account of ABS where in theory the referring party may actually end up owning the law firm and channelling all their referrals into that firm.

11. If you follow Jackson’s definition of a referral fee (“any form of payment or other consideration to a party for introducing clients to a solicitor”) then every client, for example, who has a ULR will be unable to get that loss recovered because typically the solicitors who facilitate this non-cost bearing work do so on a ratio basis that for every 2 or 3 non-cost bearing cases they work on they will get 1 cost bearing case- so Jackson is endorsing a system that will cause consumer detriment.

Conclusion

In conclusion there can be no doubt whatsoever that in a free, modern and commercial market where solicitors run businesses for profit the existence of referral fees is both sensible and beneficial. The truth is that solicitors by and large aren’t very good at marketing their services and members of the public are either naive regarding their legal rights or are afraid to approach a firm of solicitors directly for fear of cost, and because of the perception the public has of the profession.

In a world of competition, and soon of alternative business structures, how can one small part of one small industry be singled out for a restriction to normal business practice? The so called Tesco Law era is almost upon us, so to believe that a business is to be prohibited from paying referral fees as a sensible way of acquiring business must surely be challenged and hopefully dismissed especially where the benefits of referral fees is so evident. I thought this was all about promoting access to justice- let the market dictate the fees.

Original Article: Claims Standards Council