Referral fees just drive up the cost of litigation without adding any real value or benefit to the consumer

The issue of insurers paying and receiving legal referral fees has been the subject of ongoing debate for too long. Insurers and their legal counterparts can argue the point all they want; the reality is that the best and most likely outcome will – and should – be based on what’s good for consumers.

With this in mind, the recommendation by Lord Justice Jackson to either ban or cap the level of referral fees paid in personal injury cases should be seen as good news by consumers.

Consumers may have several concerns – access to justice, choice of lawyer, quality of legal advice and, of course, cost and so on. The banning or capping of referral fees does nothing to diminish these consumer rights; consumers are most likely to find that in the absence or cap of referral fees, the legal experience will be fairer and less expensive.

These days, individuals are more than aware of their rights to claim compensation. Lord Justice Jackson in his final report states: “I do not accept that referral fees are necessary for access to justice. Claimants with personal injury claims would be well aware of their right to claim damages, even if claims management companies did not exist.”

Referral arrangements, if done well, provide consumers with access to good lawyers who specialise in personal injury work, as they are selected by people who regularly deal in this field. Insurers and brokers will still refer their customers to appropriate solicitors even if no referral fee is paid. Therefore, it is highly unlikely that there will be any impact on access to justice by the banning of referral fees.

The impact of referral fees has led to a contraction in the personal injury legal market, which is dominated by large firms specialising in personal injury to drive economies of scale. They provide a nationwide service and have invested in IT and case management systems so that they can provide a quality, profitable service – even after they have paid the significant referral fees.

Therefore, banning referral fees and making a commensurate reduction in the level of costs would not affect consumer choice, as the present level of access to specialist personal injury solicitors would be maintained by introducers.

In 2004, when the Solicitors Conduct Rules were amended to allow solicitors to pay referral fees, the level of referral fee paid on a personal injury claim was approximately £400. In six years, we have seen referral fees more than double.

The best service to consumers is provided by insurer panel firms who have been selected for the quality of their service, as opposed to their ability to pay the highest price for the work referred. But the banning of referral fees cannot be done in isolation. If referral fees are abolished, there must be a corresponding reduction in fees that the claimant solicitors’ charge.

Claimant solicitors’ efficiency savings have not resulted in reduced legal costs but have been passed on to the referrers in the payment of ever-higher referral fees. These costs are ultimately passed on to consumers and businesses by way of their motor and liability premiums.

So perhaps the most critical argument from the consumers’ point of view is that by banning referral fees and driving an associated reduction in fixed fees and guideline hourly rates, costs passed on to the consumer would fall. Not just legal costs, but, as insurers’ costs would drop, so too would premiums, to the benefit of all consumers.

Let’s hope that common sense and the consumer’s best interest wins the day. IT