As a new government puts spending cuts at the top of its agenda, the Jackson Review on litigation costs comes at just the right time. But proposals to ban referral fees and allow off-panel lawyers could run counter to Jackson’s intentions and hit consumer pockets even harder

Much learned ink has been spilt analysing and debating the virtues and vices of Lord Justice Rupert Jackson’s epic – 594 pages, 46 chapters – review of civil litigation costs. Everyone, it seems, has an opinion: from fears that the recommendations in his report will lead to the demise of the after-the-event (ATE) insurance market to concerns it will result in fewer cases ever making court.

But what, if anything, are insurers and brokers doing to prepare for the changes? There’s a more than reasonable chance that at least some of Jackson’s recommendations will find their way into law, if only because the newly installed Conservative/Liberal Democrat government faces tough decisions on spending cuts and may be impressed by the potential for cost savings within government departments that are routinely engaged in litigation. Indeed, Jackson makes precisely that point in his report – chapter 23, since you ask – suggesting his recommendations will yield substantial savings in legal costs for the taxpayer, chief among them the £140m annually spent on litigation by the National Health Service.

The most contentious issues to come out of the report are Jackson’s recommendations for a complete ban on PI referral fees and his desire to let policyholders choose their own lawyer rather than to have one imposed on them from an insurer’s panel. Both are central to Jackson’s overall desire to “promote access to justice at proportionate cost” or, more accurately, reduce costs.

But the industry’s response to outlawing referral fees is likely to result in higher premiums for policyholders.

“If referral fees are removed, it would necessitate an increase in cost to the consumer,” says FirstAssist Legal Protection’s head of product and pricing, Andy Glynne. “My view is that we live in a capitalist society, and if referral fees are abolished then costs to the end user will have to go up because referral fees are currently subsidising the premium that the client pays.”

Increased premiums are clearly not what Jackson intended, but Arc Legal Assistance director Richard Finan believes the entire review does little to reduce the cost of litigation in line with its original intentions. “I can’t actually see where solicitors’ costs are being reduced in Jackson,” Finan says. “At the end of the day, there is enough profit in what the solicitor gets paid by the third party to enable them to make a referral fee payment.

“There’s an old sector adage that says ‘a third cost, a third profit and a third referral fee’. If you ban referral fees but don’t reduce the amount the solicitor can recover, surely all you are doing is giving that third back to the solicitor, so that the solicitor earns two-thirds profit to offset their one-third operation cost.”

Finan believes that large brokers, particularly large motor brokers, will be casting their eyes over reasonably priced law firms in a bid to get around the recommendations, should they become law. “A large motor broker that’s earning £4m in referral fees is not going to write that income off. It is simply going to buy a law firm. That way, it gets the referral fee plus the third profit that the solicitor is making as well,” he says.

Of course, that option is not available to smaller brokers, and those that are dependent on revenue from referral fees to offset shrinking margins in other areas could find themselves struggling to compete in a post-Jackson environment.

Free to choose

When it comes to the equally thorny issue of giving policyholders freedom of choice to select the lawyer that handles their claim, the industry response is again likely to hit the consumer in the pocket.

Under the now well-established EU Legal Expenses Insurance Directive, policyholders have the right to choose a lawyer to handle their claim once proceedings have started. Therefore, in the early stages of a case, most insurers won’t indemnify an off-panel solicitor unless there are special circumstances. If Jackson’s recommendation to alter the definition of proceedings is brought in, insurers could have to indemnify off-panel solicitors from the start of the case.

In common with many in the industry, Glynne insists that such a move would increase costs significantly, and adds that the benefits of working with panel firms – the access to specialist lawyers and the buying power the panel system offers for reducing hourly rates – would be lost under Jackson’s regime. He also insists that the choice advocated by Jackson is already available to consumers.

“We do actually give customers a choice,” Glynne says. “If someone wants a policy that gives them access to a panel of solicitors, they can have it. If they want a policy that gives them access to their own solicitor, they can have that too. The cost is obviously different, but they do have the choice.

“Some businesses in certain sectors will have specialist solicitors and therefore they are best placed to choose their representation. Likewise, high net worth clients will generally have their own solicitors. But the concern would be for the person who doesn’t usually have a solicitor or recourse to a lawyer. You don’t want the solicitor that did your conveyancing handling your industrial tribunal, and that can be what happens when you go off panel.”

Glynne’s last point is borne out by the Legal Services Board (LSB), the independent body that oversees the regulation of lawyers in England and Wales. In a report published less than six months ago, the LSB revealed that 68% of consumers had “little or no knowledge of what lawyers do”. LSB chairman David Edmonds said the report revealed “consumers do not have the information or, sometimes, the skills to choose a lawyer based on their own assessment of quality or cost”.

Bring in the specialists

How much Jackson’s recommendations will improve matters and enhance choice seems to be a moot point. Jackson says the proposal should only become law if the impact on premiums “turns out to be modest”. But Finan, along with many others, insists that the increased costs will be far from modest and will prevent many people seeking justice through the courts.

“With off-panel firms, it’s in the interests of the solicitor to rack up as much cost as possible because they’re going to get paid whether they win or lose,” Finan says. “Consequently, if the change outlined by Jackson was implemented, we would have to micro manage the off-panel solicitor, which in practice means only offering indemnity in small tranches.

“So rather than saying ‘here’s a hundred thousand pounds worth of cover, come back when you’ve spent it’, we will say ‘here’s a thousand pounds worth of cover, come back when you need another thousand pounds’.

“We’ll also require them to report to us every month to tell us what’s happening, and they would have to obtain our consent before taking certain courses of action that may have a material impact on a case.

“So it’s not in the best interests of the client to use an off-panel solicitor, because the off-panel solicitor spends part of the indemnity reporting to us rather than dealing with the customer’s case.”

Essentially, the widely held belief among insurers is that off-panel solicitors have no incentive to minimise their costs in the way that panel solicitors on repeat work do. The counter argument is, of course, that the panel system does a very good job of keeping insurers’ costs down. You don’t have to be a cynic to see the possibility that panel solicitors may well be less diligent in representing a client because of the nature of their relationship with the insurer.

Not so, says Finan. “We use a top-five UK law firm that’s independently regulated by the Solicitors Regulation Authority. Moreover, it has some of the best employment lawyers in the country. An off-panel, local high street solicitor will not have the ability to deal with something like a complex employment case. They will use counsel at every single point to give them advice, and that doubles the cost of the case.

“So if a client has a legal expenses policy that only has £25,000 worth of cover, that money disappears very quickly and the client is left exposed, having to pay a top-up to the solicitor because that solicitor is using counsel all the time.”

Lawyer for life

Another way of mitigating any potential impact from Jackson on freedom of choice is to promote the merits of the panel system by highlighting to clients the services they can access through their regular insurance. Research by the Ministry of Justice in 2007 found that, despite 59% of the population having legal expenses insurance, less than one in four had heard of before-the-event (BTE) or ATE insurance.

“If you look at the points in an individual’s life when they use a solicitor, it’s typically when they purchase a property, and after that some people may enter cohabitation agreements, and after that, if they have children, they’ll probably write a will,” Finan explains. “What we’ve done is broaden out the offering, so that if a customer contacts our panel solicitor for those types of service, they can receive discounted fee arrangements.

“That encourages a relationship between the customer and our panel solicitor before they need to use the policy, so if a few years later they have an employment dispute, their natural approach would be to go back to the law firm that provided the will, so we don’t have them going off panel.”

It remains to be seen how much, if any, of the Jackson recommendations will make it to the statute book. But despite the gripes, the industry appears to be well-equipped to survive its impact relatively unscathed.

“We’ll see whether a change of government takes all this forward,” Glynne says. “But in terms of BTE, there isn’t much we would have to do to adapt to these changes if they are implemented. Overall, it’s generally positive and, if we can increase penetration across both businesses and consumers, then we believe it’s the right approach.” IT