Industry worried that setting up law firms under Tesco Law could be damaging

Robin Spencer Aviva

When three law firms became the first to get permission to become an alternative business structure (ABS) in March, cabinet minister Jonathan Djanogly was almost evangelical in his praise of the development.

Then under-secretary of state at the Ministry of Justice (MoJ) said: “Our UK legal services are unrivalled around the world and these changes will allow them to reach new heights.”

But eight months later, insurers are sceptical about the benefits, and some are even worried the change could be damaging.

Aviva UK chief executive Robin Spencer has become the latest insurer boss to voice his concern.

New entities
The Legal Services Act 2007, which is commonly known as ‘Tesco Law’, allows insurers and other companies to own law firms or employ lawyers who offer legal services directly to their customers.

However, there are worries that insurers will use the law to get around the referral fee ban. This will come into force in April 2013 under the Legal Aid, Sentencing and Punishment of Offenders Act 2012.

Speaking to Insurance Times, Spencer said: “I don’t think insurers should be needing to buy law firms. ABSs and all those things, all that is insurers trying to find loopholes to continue exploiting the system.”

His comments echo those of AXA UK chief executive Paul Evans, who last month said that because the law enables insurers to set up their own legal firms, it could be equated with the “morally wrong” practice of personal injury lawyers’ referral fees, whereby law firms pay insurers for the details of people involved in
accidents to make speculative claims.

So, where does the rest of the industry stand on buying law firms?

‘Alternative business structures are a way for insurers to find loopholes to exploit the system’

Robin Spencer, Aviva

Insurance Times asked several UK insurers for their views.

Direct Line Group (DLG) is enthusiastic about this concept, so much so that it revealed in its recent listing prospectus that it plans to apply to establish an ABS, which is a company that offers legal and non-legal services.

A DLG statement said: “In light of possible regulatory changes to remove dysfunctionality from the motor insurance market, we are looking at a variety of options, including legal services to ensure we are able to sustain our competitiveness and continue to offer customers choice, and great value and service.”

Keeping options open
Even AXA, which is concerned about the law, has to keep its options open or it could end up at a competitive disadvantage. Speaking to Insurance Times, an AXA spokesman said the company is not planning to apply for an ABS, but it will “keep this under review as government reforms are confirmed to ensure that AXA is not competitively disadvantaged”.

He added that AXA’s view is that there are two primary justifications for an ABS application: first, to “integrate the management of customer service and costs in connection with personal injury claims” and, second, to replace referral fee income from “minor, often fraudulent, whiplash injury claims” that would be lost as a result of the referral fee ban.

The spokesman also said an ABS would enable an insurer to “capture 100% of the high legal fees available under the MoJ portal, less the minor costs of the claim”, which, he added, would more than make up for the lost referral fee income.

He said that AXA banned referral fees in 2011 because it believed they represented a “perverse incentive” to promote fraudulent whiplash claims, which drive up the cost of motor insurance premiums.

But, crucially, despite Evans’ comments implying that ABSs are morally questionable, the AXA spokesman did not rule out the possibility of the insurer applying for an ABS. “If, as promised, the government dramatically reduces the Ministry of Justice legal fees to remove this incentive to promote whiplash claims, then AXA is less likely to make an application,” he said. “If, however, reforms are not forthcoming, AXA will be forced to abandon its stance so that its shareholders and customers are not disadvantaged.”

AXA’s view is that further reform of the personal injury compensation system is key. The spokesman said that without this, Tesco law offers a “simple route to replace referral fee income, potentially invalidating the intent of previous reforms”. He added that the industry’s reputation is at stake as customers consider whether insurers are doing everything they can to cut spurious claims costs and thus motor premiums.

A spokesman for Aviva said the company did not want to commit either way. “We’re concentrating on pushing through the personal injury reforms - a lot of issues will be taken care of that way.”

Looking at regulations
What stand are other major insurers taking on the issue? A Zurich spokesman said it was “looking into what opportunities the regulations allow”.

But is the law morally questionable as Evans implied? “That seems to suggest the potential opportunities related to the Legal Services Act are solely associated with retaining income from representing whiplash claimants, which is not the case,” the Zurich spokesman said. He added that ABSs could “reduce the costs associated with defendant work”.

A spokesman for QBE said the company is “not considering an application”, but would not elaborate. A source close to QBE said that because it is “not a consumer brand, an ABS would not work as well”.

An RSA spokesman was also tight-lipped, though admitting the company is considering setting up an ABS. He said: “We are just looking into the possibility of putting in an application, and we have nothing else to add on this at the moment.”

An Allianz spokesman preferred not to discuss the issue of ABSs and added that if the company did make any comments, they could “misinform and confuse should they end up in the public domain or be discussed in the market place generally”.

Talking points …

  • How much of a threat is the law? Claims companies owning legal firms is the greatest threat. But the SRA is unlikely to approve rogue organisations.
  • The government announced a “ban on inducement advertising” in August 2012. Firms with a legal arm will have to be careful with its marketing.

ABS approval procedure

Although the Tesco Law is seen as a ‘big bang’ moment for the legal industry, the approval process is quite slow.

The Solicitors Regulation Authority (SRA) has taken its time over allowing non-law firms to use the alternative business structure (ABS).

There were more than 100 applications for ABSs at the beginning of the year, but it took eight months for the number of approvals to reach double figures.

SRA executive director of authorisation Mike Jeacock had said that “protecting the public is our priority, so there will be a robust authorisation process to ensure that only those that meet all the criteria will be awarded a licence”.

Legal expenses insurer Arags managing director Ton Buss said: “It’s very slow. Not many companies, only about three a month, are approved by the SRA. It’s very small when you consider the people interested in doing it.

“I think the SRA is raising the bar in terms of who they are allowing in. I’m surprised that some companies haven’t been granted a licence.

“I don’t think the application process is straightforward. We haven’t applied and we have no intention of applying.”

Timeline: Alternative business structures

20 July 2011: The introduction of the alternative business structures (ABS) is postponed from October until the end of the year because of delays in the parliamentary process.

1 August 2011: Personal injury claims law firm Plexus Law reveals talks to sell a significant stake to private equity in a deal that would make it the first British law firm to be backed by non-lawyers.

1 September 2011: Legal fees insurance provider Abbey Protection says it is considering buying a law firm to take advantage of the new legislation.

30 September 2011: The SRA tells Insurance Times that it has received about 500 calls, had in-depth discussion with 50 firms and 15 serious discussions with insurance industry-related people about taking a stake in a law firm.

1 December 2011: The SRA confirms that it will begin accepting ABS licensing applications from 3 January 2012.

22 August 2012: Parabis Group becomes the first private equity-backed firm to be granted an ABS licence.

8 October 2012: AXA chief executive Paul Evans slams Tesco Law, calling it “morally wrong”, and Direct Line Group reveals in its listing prospectus plans to apply for an ABS.

Tesco Law: insurers’ arguments


  • Improves customer choice
  • Improves customer service
  • Integrates customer service and costs in relation to personal injury claims
  • Provides a source of income to replace that lost by the referral fee ban


  • Could jeopardise insurers’ reputation
  • May make customers doubt that insurers are doing all they can to reduce spurious claim costs and therefore premiums
  • Could be seen as being morally wrong

To see click a graphic of the current situation vs under Tesco law and of the domestic motor insurance results, click here.