Banning referral fees could ‘do more harm than good’

Banning referral fees would not be enough on its own to curb spiralling bodily injury claims inflation and could even do more harm than good, insurer bosses have warned.

In an interview in this week’s Insurance Times, Groupama managing director Laurent Matras – a long-term campaigner for greater transparency surrounding referral fees – said that a ban was only a part of the equation.

Matras said that a ban would only work together with moves to curb the fixed costs paid to lawyers, which would make it uneconomic to pay fees.

He added that both moves had to be carried out in tandem with the introduction of stricter tests for whiplash, which could be used to root out fraudulent claims for injury. “This is the only credible solution to the problem,” he said.

Matras was speaking as parliament prepared to reassemble next week and resume its scrutiny of the Legal Aid, Sentencing and Punishment of Offenders Bill, which will implement the bulk of the Jackson Review’s recommendations on curbing civil litigation costs.

Ministers will come under pressure to include a referral fee ban in the bill from ex-justice secretary Jack Straw, who has secured parliamentary time to debate the issue on 13 September.

Speaking to Insurance Times after Ageas UK released its first-half results last week, chief executive Barry Smith backed Matras. He said: “If you just ban referral fees

I think the unintended consequences could be as severe, if not more severe, than the current position – namely, the growth of legal services companies and profitability flowing out of the insurance sector into those companies.”

Smith contended that the way to tackle the referral fees problem was “more proportionate” legal fees for personal injury work undertaken by lawyers, which would in turn reduce the scope for payment of large amounts in referral fees.

“We are saying: let’s set the fee proportionately to the work involved. This will include some profit for the lawyer, but take away the opportunity to pay excessive fees.”

Admiral chief operating officer David Stevens agreed, arguing that banning referral fees alone could result in “an explosion of TV advertising, people stopping you in the street, texts and other ways for lawyers to drive revenue, which will mean the positive effect of banning referral fees is very swiftly offset”.

Stevens’ comments follow Admiral’s revelation that 5.6% of its first-half 2011 UK pre-tax profit came from referral fees – an amount he admitted was under threat from a potential referral fee ban.

This comes as the ABI is lobbying the government to include a referral fee ban in the bill.

An ABI spokesman agreed that a ban alone was not enough. “There’s no silver bullet to tackle this problem,” he said. “We need to ban referral fees as part of a much wider programme of reform, most of which is contained in the bill. If you just ban referral fees without tackling legal costs and fixed fees, it is going to be counterproductive.”

The spokesman added that the ABI is planning to publish a document next week setting out the ABI’s referral fee concerns in full.

Several companies have taken action individually on referral fees, with insurers AXA and Zurich both saying they would stop accepting them. Last week, AXA-owned broker Bluefin joined the list, although managing director Mike Bruce said the curb would have a “negligible effect” on the company, as it had only recently begun accepting them.

Some have questioned the wisdom of insurers acting alone, however. “There is no real positive impact, but the insurer ends up that much poorer, which has a negative impact on our insurance premiums,” Admiral’s Stevens said.

We say …

? It is true that if referral fees were banned, then there would be some unintended consequences, as some insurers have warned.

? But a glance north of the border – where the Scottish government has never relaxed its own clampdown on referral fees – does not match the dystopian picture painted by Admiral, which generates 5.6% of its profits from referral fees.

? A clampdown on the fixed costs paid to solicitors needs to happen. But a ban on referral fees is an important element in any package to clamp down on runaway claims costs sooner rather than later.