Legal Services Board report did not call for a blanket ban despite saying they could give legal services a bad name

Ken Clarke and Jack Straw probably don’t agree about much. But one topic unites the justice secretary and his Labour predecessor: referral fees.

Clarke, speaking in parliament, described the payment of referral fees as an “extraordinary practice”, which was luring members of the public into making claims.

This week, Straw described referral fees as a “huge racket”, and called for their abolition. Sadly, he only appears to have become aware of the problem after a friend was harassed by text messages from a claims farming company, not when he was in charge of the Ministry of Justice and able to do something about the issue.

Despite this evidence of high-level concern, there is still a lot more rhetoric than action surrounding the issue of referral fees.

Last week’s Justice Bill, which implements many of the recommendations in the Jackson Review of civil litigation costs, ignores referral fees, not even taking forward the judge’s proposal that they should be capped.

Why, given the mounting concerns about the subject, has the government not moved to scrap referral fees?

Customer confidence eroded

The most recent significant move on the topic was the Legal Service Board (LSB)’s report on referral fees.

When it published its Jackson Review implementation plan at the end of last year, the government said that it was waiting for the LSB’s conclusion before deciding whether to press ahead with any clampdown on referral fees.

The board, which oversees the regulation of lawyers, identified “potential dangers in the unregulated operation of referral fees, not least that they are seen to undermine consumer confidence in legal services. There is clear evidence that current disclosure and compliance arrangements do not do enough to ensure consumer and public confidence”.

But the report goes on to say: “Equally, there is relatively little evidence of actual or potential harm to consumers or the public interest.”

As a result, the board decided against a blanket ban.

John Spencer, vice-president of the Motor Accident Solicitors Society, criticises the LSB for taking an overly narrow approach to referral fees, asking why the board did not take into account the wider consumer detriment stemming from referral fee-fuelled increases in motor insurance premiums. “They have not looked beyond their noses,” he says.

Zurich personal injury claims manager David Southwell agrees, saying that he was “hugely disappointed” by the LSB’s conclusion.

Government back-pedalling?

At a recent Forum of Insurance Lawyers debate on the Jackson Review, MoJ head of civil legal costs Robert Wright shed a little light on the government’s stance.

Wright said that the government backed the transport select committee’s recent controversial proposal that insurers should disclose their referral fee income.

He said: “The government welcomes the transport select committee’s recommendation that the insurance industry should look at the introduction of more transparency on referral fees.”

But speaking later in a personal capacity, he indicated frustration about the lack of substance behind calls for a total ban on referral fees.

He said: “There seems to be a clear view that referral fees should be banned or capped, but less detail about how that should happen and what practically the government should do.”

For Jonathan Evans MP, chairman of the all-party parliamentary group on insurance and financial services, this explanation doesn’t wash. Arguing that the primary issue is that referral fees are wrong, he adds that the government has back-pedalled on the issue under pressure from the access-to-justice lobby.

Justice minister Jonathan Djanogoly has expressed hope that the wider Jackson-inspired reforms will take money out of the claims process, making it less worthwhile for solicitors to pay referral fees.

AXA commercial claims and underwriting director David Williams believes that the greater political focus on referral fees will sharpen the focus on the issue. He says: “I don’t think this battle is over yet.”