Ban on referral fees designed to curb compensation culture

The Government has vowed to impose a ban on referral fees in a bid to stamp out spurious and inflated personal-injury claims.
 
Referral fees are paid by lawyers to intermediaries, such as insurance firms and claims-management companies, for directing them to personal-injury claimants.
 
According to the Government, the current arrangements have resulted in a burgeoning compensation culture, and the growth of a related industry that pursues claimants for profit. Faced with increased compensation claims, insurance companies pass the costs they incur directly on to insurance policy-holders by hiking up premiums. To cover higher costs, private companies put up prices, and public authorities pass the burden on to taxpayers.
 
However, some stakeholders point out that, traditionally, lawyers have been ineffective at marketing themselves, and argue that referral fees serve a positive role in helping genuine claimants gain access to justice.
 
Announcing the Government’s plans, Justice minister Jonathan Djanogly said: “The ‘no-win, no-fee’ system is pushing us into a compensation culture in which middle men make a tidy profit, which the rest of us end up paying for through higher insurance premiums and higher prices.”
 
He added: “Referral fees are one symptom of the compensation-culture problem, and too much money sloshing through the system. People are being encouraged to sue, at no risk to themselves – leaving schools, business and individuals living in fear of being dragged to the courts for simply going about daily life.”
 
The Association of British Insurers (ABI) welcomed the announcement. The group’s director-general, Otto Thoresen, said: “We are very pleased that the Government has listened to the insurance industry’s campaign for a ban on referral fees. They add no value and encourage spurious and exaggerated personal-injury claims.
 
“It is important that the ban must be watertight, and apply across the board. Banning referral fees is an important first step in tackling our dysfunctional compensation system, and needs to be accompanied by a reduction in legal costs and action to tackle whiplash if honest customers are to benefit from these reforms.”
 
However, the Association of Personal Injury Lawyers (APIL) fears that outlawing referral fees will simply drive them underground. Chief executive Deborah Evans said: “Instead of trying to ban referral fees, why not introduce real solutions to tackle the real problems in the system? Why not impose an outright ban on the passing-on of injured people’s private details without their express consent, on every occasion?
 
“APIL has also called for a strict and consistent ban on cold calling. Solicitors are already robustly regulated in this – quite rightly, but defendant insurers are able routinely to approach injured people, offering to settle claims directly by the back door, and encouraging claims that may not otherwise have been made.”
 
The ban on referral fees is just one element in the Government’s focus on restricting the compensation culture. Djanogly explained: “The Government’s proposals, currently before Parliament, focus on stopping losing defendants having to pay a ‘success fee’ to reimburse the claimant’s lawyer for other unconnected cases he may have lost. The Government is changing the law so that, in future, the person making the claim will have to pay the success fee, rather than the defendant, and that fee will be capped.
 
“The intended result is a fairer split of costs between parties, and lower legal costs overall, which means lower costs to pass on to customers, or taxpayers.”
 
The proposals, which are contained in the Legal Aid, Sentencing and Punishment of Offenders Bill, follow a Ministry of Justice consultation published in November last year. Much of the evidence base for this consultation came from an independent review of civil-litigation costs carried out by Lord Justice Jackson.

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