Tough new curbs will be debated by the solicitors’ profession today to stamp out what has become a multimillion- pound trade in “backhanders” paid by solicitors to buy in accident claims and other cases.
There is mounting concern that a relaxation of rules three years ago banning such payments has led to a flourishing industry in the “trafficking” of cases — particularly accident claims — which can leave victims short-changed.
Last month the Lord Chancellor stepped into the controversy, saying that he would like to see the practice prohibited. Lord Falconer of Thoroton told solicitors at their annual conference in London that it was a decision for the profession to make but that he was keen “to see as much pressure as possible to get rid of” referral fees.
Solicitors enter into confidential arrangements to pay up to £700 a case to insurers, to claims management companies, to estate agents or other solicitors to be referred work.
But critics say that this puts solicitors under pressure to settle cases swiftly, perhaps at a lower level of damages than justified or to cut corners because the money already paid out squeezes their profit margins.
Advertisement
Consumer choice of solicitor is also removed because clients are referred to the panel of solicitors paying the fees for the work — not to the best lawyer but to the highest bidder, critics say. Fraser Whitehead, a partner at the trade union firm Russell Jones & Walker, said that the “referral fees” had risen in recent years from £150 a case up to as much as £650 to £700.
He said that the reality was that “a very expensive trade in legal cases has sprung up”, largely outside the control of the profession and its regulation. “The vast majority of accident claims are in the region of £2,500 to £3,000. The £650 fee can’t come from the victims’ damages — so the most likely thing is that the level of service is reduced. The truth is that the consumer pays for the fee in a highly reduced level of service.”
Mr Fraser said that although the Law Society insisted that the fees were disclosed to clients, there was a problem with enforcing this. “The fee is not always per case. It can be for a tranche of work, which is impossible to explain to the consumer and meaningless as to what is really going in. So the level of compliance is abysmal.”
The Office of Fair Trading had said that a ban on fees impeded competition and access to justice, he added. “But the scale of the fees actually reduces competition. If someone says: ‘You can have all these cases — say 5,000 for £100 per case — that’s half a million pounds. That’s a large sum to find and only the big firms can do it.”
The work, he added, was therefore going to the solicitor who pays the highest fee, not necessarily the person most skilled. “Choice of solicitor becomes meaningless.”
Advertisement
Another lawyer, Larry Shaw, a legal executive handling accident claims with Rowley Ashworth, said that the practice was not common in firms such as his that took work directly from trade unions. “The whole thing is an insurance merry-go-round. When legal aid was abolished for accident claims, it led to this whole compensation market, with claims farmers and so on — everyone wanted their snouts in the trough.”
In effect, insurance companies get paid twice: by the consumer and then by the solicitor, he added. Recently a new campaign group, the Accident Relief Campaign, attacked the “£270 million-a-year rip-off” of motorists who pay £15 for legal expenses insurance on top of insurance premiums when their claims are then just sold on to lawyers.
But some firms are strongly in favour of the practice and argue that it is to the benefit of clients. John Spencer, in charge of personal injury work at Shoosmiths, the national law firm, said that consumers got a good service that was rigorously enforced. “We have 50,000 new instructions a year in this area and we have had less than a handful of clients raising any question about the referral fee. They are either not interested or not concerned about it.”
He declined to say how much was paid for each case, saying that these were confidential agreements. But he said that the agreements put the “paramountcy of the client’s interests first”. “The agreements contain exacting levels of service — so that we are on call 24/7 for the client, have to reply to letters within three days and phonecalls within an hour — all of these are not commonplace in the legal profession. So the insurers can insist on very high levels of service for policyholders.”
Insurance companies are also divided on the issue. David Williams, claims director of AXA Insurance, said: “We don’t accept referral fees because we feel that they have nothing to add to the legal process beyond unnecessary cost. We have written to ministers saying the current system is wrong and needs radical overhaul. In some relatively simple cases these fees are now £700. There is no way that is a reasonable amount and while some parties are benefiting from that money, it has to be recovered from somewhere.
Advertisement
“The cost simply gets built into the claim somehow: the total cost of claims is what determines the price of insurance, so we need to be clear that whether it is an insurer, a claims farmer or another legal firm that takes the referral fee, it is the man in the street who ends up paying for them.”
Today the Law Society Regulation Board will look at whether to reimpose a ban or whether instead to try to toughen enforcement. Some say the genie cannot be put back in the bottle and that referral fees are common business practice that solicitors should accept but properly regulate. Others talk of the “corrosive effect” of the fees on the profession’s standing. One lawyer said: “It is a close call. But if solicitors cannot regulate the practice in the public interest, then the only option is a ban.”