Referral fees in personal injury claims
Standard Note: SN/HA/6015
Last updated: 3 November 2011
Author: Catherine Fairbairn
Section Home Affairs Section
Referral fees and arrangements can take different forms. Although they are also used in
other commercial relationships, they have attracted particular attention when they involve the
legal professions. The Legal Services Board (LSB), which is the independent body
responsible for overseeing the regulation of lawyers in England and Wales, has defined them
as “any payment made for the referral or introduction of any client or potential client”.
The Bar Standards Board, which regulates barristers, does not allow the payment or receipt
of referral fees. Other legal professionals are allowed to use referral fees subject to
compliance with rules set out by their regulatory bodies. The Law Society has called for
referral fees to be banned for all legal professionals.
In his Review of Civil Litigation Costs: Final Report, Lord Justice Jackson recommended that
referral fees should be banned in personal injury cases. In May 2011, the LSB announced
that it would not seek an immediate outright ban of referral fees in the legal services market;
instead, the LSB’s approach was to strengthen transparency obligations and it published new
guidance for regulatory bodies. A number of interested parties criticised the LSB’s approach.
Although other measures relating to civil litigation funding and costs were included in the
Legal Aid, Sentencing and Punishment of Offenders Bill, when it was introduced in
June 2011, the Government initially said that it would await the outcome of the work being
done by the LSB before deciding how to proceed on the issue of referral fees. Government
amendments to the Bill, agreed at report stage on 1 November 2011, added new provisions
which would ban the payment and receipt of referral fees in personal injury cases. Breach of
the new provisions would be a regulatory, rather than a criminal, offence.
The House of Commons Transport Committee has called for a more transparent regime for
referral fees. The House of Commons Justice Committee has welcomed the Government’s
proposals to ban referral fees. Jack Straw has criticised the practice of insurance companies
selling the details of car accidents to personal injury lawyers. In September 2011, he
introduced a ten minute rule bill which included proposals to prohibit the payment of referral
fees in personal injury road traffic claims.
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and is not intended to address the specific circumstances of any particular individual. It should
not be relied upon as being up to date; the law or policies may have changed since it was last
updated; and it should not be relied upon as legal or professional advice or as a substitute for
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Contents
1 What is a referral fee? 3
2 What is the current position? 3
3 What are the arguments for and against the use of referral fees? 4
4 Should referral fees be banned? 4
4.1 The Jackson review: referral fees in personal injury cases should be banned 4
4.2 Legal Services Board: no outright ban, but increased transparency obligations 5
The LSB consultation 5
The LSB response and guidance 6
Reaction to the LSB’s response and guidance 8
4.3 Jack Straw calls for reform of referral fees 8
5 Government proposals to ban referral fees in personal injury cases 8
5.1 Initial Government response to the Jackson review 8
5.2 Proposal to ban referral fees 9
5.3 Amendments to the Legal Aid, Sentencing and Punishment of Offenders Bill 9
6 Consideration of referral fees by Select Committees 11
6.1 The House of Commons Transport Committee’s report 11
6.2 The House of Commons Justice Committee’s report 13
2
1 What is a referral fee?
Referral fees and arrangements can take different forms and involve a range of different
parties. Although they are also used in other commercial relationships, they have attracted
particular attention when they involve the legal professions. 1 The Legal Services Board
(LSB), which is the independent body responsible for overseeing the regulation of lawyers in
England and Wales, when considering the use of referral fees and arrangements by legal
professionals, adopted the following definition:
Any payment made for the referral or introduction of any client or potential client. 2
The LSB highlighted the difficulty of defining referral fees:
As we have seen from earlier restrictions on referral fees, it is possible to blur
definitions through using sub-contracting arrangements, payment in kind and
marketing costs as a cover for the referral fee. It is important to recognise the
difference between clear-cut referral fees, referral arrangements and fee-sharing
agreements. Referral fees exist where a lawyer makes a payment to an introducer for
the opportunity to represent a client in a variety of circumstances. In this situation, the
client contracts directly with the lawyer. A referral arrangement may exist where a firm
may introduce clients in return for free or discounted services. In a fee-sharing
arrangement, the introducer receives the full amount of the relevant fee. The introducer
then passes on a proportion of this fee to the referred lawyer. 3
2 What is the current position?
The Bar Standards Board, which regulates barristers, does not allow the payment or receipt
of referral fees. Other legal professionals are allowed to use referral fees subject to
compliance with rules set out by their regulatory bodies. In his Review of Civil Litigation
Costs: Final Report, Lord Justice Jackson set out information about the rules governing
solicitors at that time:
Rule 9 of the Solicitors Code of Conduct 2007 governs the referrals of business to and
from solicitors. Rule 9.01 provides that, when making or receiving referrals of clients to
or from third parties, a solicitor must do nothing which would compromise their
independence or ability to act and advise in the best interests of their clients. Rule 9.02
includes additional requirements where a solicitor enters into a financial arrangement
with an introducer. The agreement between the solicitor and the introducer must be in
writing. Before accepting instructions to act for a client referred in these circumstances,
the solicitor must give to the client in writing all relevant information concerning the fact
that they have a financial arrangement with the introducer and the amount of any
payment to the introducer which is calculated by reference to that referral. 4
In March 2004, the Solicitors’ Conduct Rules had been amended to allow solicitors to pay
referral fees. This followed a report by the Office of Fair Trading, published in 2001,
Competition in professions which considered that the ban on referral fees at that time might
be hampering (among other things) the development of an online marketplace that could
bring clients and solicitors together.
1
Legal Services Board, Referral fees, referral arrangements and fee sharing, September 2010
2
Legal Services Board, Referral fees, referral arrangements and fee sharing, September 2010, p16
3
Ibid
4
Review of Civil Litigation Costs: Final Report, January 2010, p195. Further information about Lord Justice
Jackson’s Review is set out in section 4 of this note.
3
The Law Society’s current policy on referral fees calls for a ban on referral fees for legal
professionals generally but not unilaterally only for solicitors:
For as long as referral fees can be requested of any provider of legal services, it would
be against the best interests of the profession for solicitors to be banned unilaterally
from paying referral fees.
The Law Society is of the view that, if referral fees are to remain, there should be strict
rules on referral fees aimed at reinforcing a solicitor’s independence and duty to their
client, which should be robustly enforced by the SRA.
As referral fees have the potential to limit access to justice and reduce the quality of
legal services, the Law Society should make representations to Government and the
Legal Services Board, encouraging the banning of referral fees by all providers of legal
services.’
In accordance with the policy of Council and Section 52 of the Legal Services Act 2007
(‘LSA 2007’), the Law Society should press the Legal Services Board to require all
Approved Regulators to ban referral fees by those providing legal services as being
contrary to the regulatory objectives contained in Section 1 of the LSA 2007. 5
3 What are the arguments for and against the use of referral fees?
In its discussion document, Referral fees, referral arrangements and fee sharing, the LSB set
out the broad arguments for and against banning referral fees:
Referral fees are a contentious feature of today’s legal services marketplace.
On the one hand it is argued that they are economically inefficient and morally
indefensible - that it is simply wrong to trade individuals’ legal requirements, that doing
so drives up costs and charges and hence reduces access to justice.
On the other hand, it is argued that referral fees are simply a legitimate client
acquisition cost. Lawyers have not always been effective in marketing their services
and some clients have been left unserved. Claims management companies and
insurance companies have therefore helped to correct this deficiency in the market and
so furthered the cause of access to justice. For this service, a fair profit is justified and
the ability of lawyers to pay fees for their services should not be denied. 6
4 Should referral fees be banned?
4.1 The Jackson review: referral fees in personal injury cases should be banned
In November 2008, Sir Anthony Clarke, who was then Master of the Rolls, appointed Lord
Justice (Sir Rupert) Jackson to conduct a review of legal costs. The purpose of the review
was “to carry out an independent review of the rules and principles governing the costs of
civil litigation and to make recommendations in order to promote access to justice at
proportionate cost”. 7 The review commenced in January 2009. Lord Justice Jackson
published a Preliminary Report on 8 May 2009, and a Final Report in January 2010. 8 One of
5
The Law Society, Review of civil litigation costs: final report Response by the Law Society Of England And
Wales, October 2010
6
September 2010
7
Judicial Communications Office news release, “Lord Justice Jackson appointed to undertake review of civil
costs”, 3 November 2008, The terms of reference for the review are set out in the Review of Civil Litigation
Costs: Final Report, p2
8
For information on other recommendations made by Lord Justice Jackson, see Library Research Paper RP
11/53, Legal aid, Sentencing and Punishment of Offenders Bill
4
his recommendations was that referral fees in personal injury cases should be banned. Lord
Justice Jackson said that the evidence he had received indicated that there was no benefit in
competition terms to be gained from allowing referral fees:
In very many cases, though not of course all cases, referrers simply refer cases to the
highest bidder. That is in no sense matching case to solicitor or remedying the
information asymmetry. On occasions it leads to clients being sent to the wrong
solicitors with potentially damaging results... The effect of allowing referral fees is that
clients now have less choice than they would if referral fees were prohibited. 9
Lord Justice Jackson did not consider that referral fees offered real value to the process of
litigation or that they were necessary for access to justice. He said that they were wrong in
principle and that they added to the high costs of personal injury litigation:
4.11 There is also a wider point. In my view, it is offensive and wrong in principle for
personal injury claimants to be treated as a commodity. BTE insurers should not be in
the position of auctioning off the personal injury claims of those whom they insure. It is
equally unacceptable for claims management companies to buy in personal injury
claims from other referrers and then sell them on at a profit. Indeed the very language
of the claims management industry characterises personal injury claims as a
commodity. Strong cases ready to be pursued are described as “oven ready”.
(...)
4.16 In my view the fact that referral fees are paid as a matter of routine is one of the
factors which contributes to the high costs of personal injuries litigation. The lifting of
the ban on referral fees in 2004 has not proved to be of benefit either to claimants or to
the providers of legal services. The only winners are the recipients of referral fees. 10
Lord Justice Jackson recommended that the payment of referral fees for personal injury
claims be banned, but if this primary recommendation was rejected, that referral fees be
capped at a modest figure, which he suggested should be £200. He said that if either of
these recommendations was accepted, serious consideration should be given to the question
of whether referral fees should be banned or capped in other areas of litigation. 11
4.2 Legal Services Board: no outright ban, but increased transparency obligations
The LSB consultation
The Legal Services Board (LSB) began its review of referral fees, referral arrangements and
fee sharing in November 2009 in response to an approach by the Law Society setting out the
views of its Council that there should be a ban on all forms of referral fees across all the
regulated legal professions.
In September 2010, the LSB published proposals for consultation, Referral fees, referral
arrangements and fee sharing. The Executive Summary set out the LSB’s approach and
stated that the LSB, at that stage, considered neither an outright ban nor a “free for all” to be
appropriate, but that there should be increased transparency:
Our preliminary hypothesis is that the simple solutions of an outright ban or a laissez
faire free for all are both unacceptable. The first proposition would, in our view, be a
wholly disproportionate action when the economic evidence is that consumers do not
9
Review of Civil Litigation Costs: Final Report, January 2010, p203
10
Review of Civil Litigation Costs: Final Report, January 2010, pp204-6 (footnotes omitted)
11
Review of Civil Litigation Costs: Final Report, January 2010, p206
5
suffer detriment from the existence of referral fees and, indeed, that there may even be
access to justice benefits from their retention. Lawyers are under no obligation to pay
such fees: independent marketing is a viable alternative. To outlaw such practices
when viable alternatives exist therefore could fail a test of regulatory proportionality.
But it would be wrong to ignore the public, professional and judicial concern about
referral fees. As marketing in this area is not wholly effective, the level of costs for
customer acquisition is almost certainly higher than it would be in a better functioning
market. ... The question for regulation now, is how best to put incentives in place to
reinforce ethical behaviour that maintains public confidence, whilst making the market
work more effectively. We believe that the Consumer Panel’s recommendation about
transparency is crucial. There need to be two levels of transparency. There needs to
be transparency to the individual client. This includes transparency about the existence
of a fee and its level and, above all, lawyers must make clear to the individual that they
retain the right to “shop around” rather than have their case traded. We believe that
there is a need to make the level of referral fees more transparent generally: to the
marketplace, to consumer bodies and to commentators. We believe that this level of
transparency will aid general economic efficiency, allow for the accurate tracking of
trends and give firms every incentive to consider actively where and how to invest to
acquire work in a way that minimises their own costs and contributes to lower charges
for consumers.
The LSB considered that the alternative to an outright ban was active regulatory oversight:
This also implies that the regulatory role must be active. A regulatory framework for
transparency must be policed and, where necessary, enforced. The alternative to an
outright ban or free for all is active regulatory oversight. Regulators will need to keep
their own frameworks and enforcement activity under active review over the coming
five years in the light of changes within the legal services market generally. What
constitutes a proportionate response now may well not do so in a world of more
general ABS penetration or, indeed, in an era in which the level of legal literacy in the
general population has increased. Both the nature of the challenges faced by
regulators and the efficacy of potential solutions will change over time. The issue will
therefore remain on the agenda of the Legal Services Board and that of the approved
regulators whom we oversee. We want to test our thinking in this paper with a wide
range of consultees over the coming months and reach a final policy position early next
year. At that stage, we will invite approved regulators to review their own practices in
the light of our conclusions. We will then work with approved regulators on
implementation. 12
The LSB response and guidance
On 27 May 2011, the LSB published its response, Referral fees, referral arrangements and
fee sharing Decision Document. This set out the LSB’s decisions about the future regulation
of referral fees in the legal services market and confirmed that it would not seek an
immediate outright ban. Instead, the LSB’s approach would be to strengthen transparency
obligations.
The LSB maintained the view that the purely regulatory case for a general ban in the legal
services market had not been made out, because there was insufficient evidence of
consumer detriment. The LSB published new guidance and said it required approved
regulators 13 to make sure that consumers know when referral fees are in operation and to
12
Legal Services Board, Referral fees, referral arrangements and fee sharing, September 2010, pp4-5
13
Approved regulators are the regulatory bodies for lawyers
6
whom they are being paid. The approved regulators would also need to improve regulatory
policing of lawyers’ obligations. 14
David Edmonds, Chairman of the Legal Services Board said:
Before this exercise, the debate on referral fees was characterised by high passions
but a lack of hard evidence. Following this detailed investigation, we are persuaded
that the interests of consumers are best served by continuing to permit referral fees,
but managing their impact through shining the light of transparency on them.
We have set out a range of measures that can help achieve this – with the approved
regulators free to choose what is best suited to their part of the market. Whilst they will
have the flexibility to tailor action, securing these outcomes is essential and we will
track progress carefully over the coming months. 15
The LSB response set out the outcomes that it wished to achieve for consumers:
a. regulators have in place arrangements that:
i. reduce the likelihood of detriment to consumers as a result of allowing referral
fees, referral arrangements and fee sharing
ii. can justify any restriction on referral fees, referral arrangements and fee
sharing with reference to evidence, Regulatory Objectives and Better
Regulation Principles.
b. consumers know when referral fees and/or referral arrangements are in place in
order to inform their choices. 16
The LSB said that specifying these outcomes, but leaving approved regulators free to find
the best ways of working towards them in their own parts of the legal services market,
represented the right balance between the need for consistency of approach and the need to
tailor the response to the different conditions and risks across the sector. The LSB indicated
that it would expect approved regulators to review their own practice to ensure that the
outcomes were achieved.
The LSB also published guidance with statutory force and outlined how it would proceed:
The Board intends to undertake a review of approved regulators’ approaches to
regulation of referral fees, arrangements and fee sharing. This would be focused on
consumer benefit in terms of accessibility and value for money in particular. This
review will take place after they have put in place their own arrangements to respond
to the attached Guidance (including monitoring its impact on the market) in 2013-14.
It will be the action of approved regulators in improving their regulatory frameworks and
operations, and, even more importantly, the ability of all parts of the profession and its
partners to show that they can operate ethically and transparently within those
frameworks, which will determine what, if any, further action is necessary at that
stage. 17
14
Legal Services Board press release, Regulation of referral fees for legal services, 27 May 2011
15
Legal Services Board press release, Regulation of referral fees for legal services, 27 May 2011
16
Legal Services Board, Referral fees, referral arrangements and fee sharing Decision Document, May 2011, p6
17
Legal Services Board, Referral fees, referral arrangements and fee sharing Decision Document, May 2011, p7
7
Reaction to the LSB’s response and guidance
The Law Society criticised the LSB’s report and expressed its disappointment and regret that
the LSB “had made the wrong decision” and thus failed to prohibit referral fees. They said
the report failed to reflect public, judicial and professional concern about referral fees and
fails the public interest. 18
The following articles include selections of quotes from interested parties:
• “No blanket ban on referral fees”, New Law Journal, 3 June 2011
• “Bar attacks LSB for failing to ban referral fees for advocates”, Solicitors Journal,
1 June 2011
• Association of British Insurers News Release, “Legal Services Board report on referral
fees is a missed opportunity says the ABI”, 27 May 2011
• “Approved regulators can ban referral fees if justified”, Solicitors Journal, 27 May 2011
4.3 Jack Straw calls for reform of referral fees
On 27 June 2011, Jack Straw criticised the practice of insurance companies selling the
details of car accidents to personal injury lawyers. Writing in The Times, he called for
Lord Justice Jackson’s recommendation on referral fees to be implemented and for reform of
the motor insurance industry. 19
On 13 September 2011, Jack Straw introduced a ten minute rule bill, Motor Insurance
Regulation Bill. 20 Amongst its proposals is that:
It shall be unlawful for any person to solicit, offer or pay any referral fee relating to a
personal injury road traffic claim, and no such fee shall be recoverable as costs of any
legal advice, assistance or actions.
The Bill is due to have its second reading on 20 January 2012.
5 Government proposals to ban referral fees in personal injury cases
5.1 Initial Government response to the Jackson review
On 15 November 2010, the Ministry of Justice launched a consultation, Proposals for reform
of civil litigation funding and costs in England and Wales. 21 This consultation sought views
on implementing a package of Lord Justice Jackson's proposals for reforming conditional fee
agreements and other aspects of civil litigation funding and costs. Further information about
the consultation and the Government’s response is available in a Library research paper on
the Legal Aid, Sentencing and Punishment of Offenders Bill. 22
However, the Government did not consult on the issue of referral fees, and, although, when it
was introduced in June 2011, the Legal Aid, Sentencing and Punishment of Offenders Bill
18
Law Society press release, Law Society- Legal Services Board 'mistaken ' for not recommending ban on
referral fees - a decision which will damage the public interest, 27 May 2011
19
Jack Straw, “'Dirty secret' that drives up motor insurance; Companies are selling drivers' details to claims firms
exploiting the no-win, no-fee system”, The Times, 27 June 2011
20
Bill 229, 2010-12; HC Deb 13 September 2011 cc896-8
21
Proposals for Reform of Civil Litigation Funding and Costs in England and Wales Implementation of Lord
Justice Jackson’s Recommendations, Consultation Paper CP 13/10, November 2010, Cm 7947
22
Library Research Paper RP 11/53, Legal aid, Sentencing and Punishment of Offenders Bill
8
included provisions intended to implement other proposals made by Lord Justice Jackson, it
did not include any provision intended to ban referral fees. The Government recognised that
this was a contentious issue but said that it would await the outcome of work being done by
the Legal Service Board before deciding how to proceed. 23
5.2 Proposal to ban referral fees
On 9 September 2011, the Government announced that referral fees in personal injury cases
would be banned. 24 In a written ministerial statement made on that day, Jonathan Djanogly,
Parliamentary Under-Secretary of State for Justice, said that current arrangements had led to
the growth of an industry that actively encouraged individuals to bring cases, regardless of
the merits of their claim and spoke of the effect on insurance premiums:
The Government strongly believe that it is not in the public interest for potential
claimants to be sought out and encouraged to make claims by people who profit from
their claims being pursued. We believe that referral fees add to the high costs and
volume of personal injury litigation, one of the factors underpinning increases in
insurance premiums. As my right hon. Friend Lord Young recognised in his report,
“Common Sense, Common Safety” last year, referral fees also contribute to the risk of
a corrosive compensation culture.
(...)
Our aim is to reform the system to end the abuses that have occurred while ensuring
that victims who have suffered a personal injury through someone else’s negligence
remain able to make a claim for damages where they have an appropriate case.
Alongside the planned reforms to conditional fee agreements, the ban on referral fees
will contribute to the Government’s plans to tackle the compensation culture by
discouraging unmeritorious claims and controlling the disproportionate costs of
personal injury claims, without denying access to justice.
On 26 October 2011, Kenneth Clarke, Secretary of State for Justice and Lord Chancellor,
announced that he was tabling amendments to the Legal Aid, Sentencing and Punishment of
Offenders Bill to ban referral fees in personal injury claims. 25
5.3 Amendments to the Legal Aid, Sentencing and Punishment of Offenders Bill
On 1 November 2011, at report stage, Government amendments to the Legal Aid,
Sentencing and Punishment of Offenders Bill were agreed to add new provisions relating to
referral fees. 26
The new provisions would prohibit the payment and receipt of referral fees by making it a
regulatory offence (rather than a criminal offence) to pay or receive referral fees in personal
injury cases. The prohibition could be extended to other types of legal business of a
description prescribed in regulations made by the Lord Chancellor. A regulated person
would also breach the new provisions if they arranged for another person to provide services
to the client and they were paid for making that arrangement.
23
Proposals for Reform of Civil Litigation Funding and Costs in England and Wales Implementation of Lord
Justice Jackson’s Recommendations, Consultation Paper CP 13/10, November 2010, Cm 7947, p81
24
HC Deb 9 September 2011 c32WS
25
Ministry of Justice press release, Better protection from intruders and excessive compensation costs,
26 October 2011
26
HC Deb 1 November 2011 cc822-849
9
Payment would include ‘any form of consideration’, but not the ‘provision of hospitality that is
reasonable in the circumstances’. Rules made by relevant regulators could provide for the
payment to be treated as a referral fee unless the regulated person showed that the payment
was made as consideration for the provision of services, or for another reason, and not as a
referral fee. A payment that would otherwise be regarded as consideration for the provision
of services of any description might be treated as a referral fee if it exceeded the amount
specified in relation to services of that description in regulations made by the Lord
Chancellor.
The ban would apply to regulated persons including solicitors, barristers, claims
management companies and insurers. Any breaches of the ban would be subject to
appropriate regulatory action by the relevant regulators. Regulators would have to ensure
they had appropriate arrangements for monitoring and enforcing the new restrictions. A
contract to make or pay for a referral or arrangement would be unenforceable.
Andy Slaughter, Shadow Justice Minister, agreed that there was “merit in a ban on referral
fees” but said that the new clause alone would have little effect, that the proposals did not go
far enough and that they should be given further scrutiny:
We believe that it deserves further scrutiny, and we hope that amendments in another
place will toughen it up, if that does not happen tonight. We also hope that
amendments to make these practices criminal offences will be accepted. We therefore
have no intention of voting against the new clauses; we simply regard them as not
going far enough. 27
Jack Straw welcomed the new clause but agreed with the Justice Committee that the ban
should not be limited to personal injury claims. 28 He tabled amendments to the proposed
new provisions, including an amendment to make a breach of the new rules a criminal
offence. Jonathan Djanogly said that the Government had considered the matter carefully
but believed that creating a criminal offence “would be a very blunt instrument in this case”
and would impose additional costs on the police and the courts in investigating and enforcing
a ban. 29 In response to Jack Straw’s amendment which would have brought within the
prohibition all agreements to pay or receive referral fees, even when a payment had not yet
been made, he said that this would be very difficult to enforce. 30
Jonathan Djanogly indicated that although there had been no specific consultation about
referral fees, many respondents to the consultation on implementing Lord Justice Jackson’s
recommendations included their views on referral fees. Those views, along with the work
undertaken by the LSB and the Transport Committee, had been carefully considered. 31 He
referred to the broad support across the House for a ban on referral fees, but acknowledged
that there was some disagreement on how best to implement the ban.
Jonathan Djanogly reiterated that the Government were fully committed to ensuring that the
ban would work effectively. He said that he was convinced of the need to have the power to
make further regulations, should the need arise, although there were no current plans to
extend the scope beyond personal injury:
27
HC Deb 1 November 2011 c828
28
HC Deb 1 November 2011 c831
29
HC Deb 1 November 2011 c825
30
HC Deb 1 November 2011 c841
31
HC Deb 1 November 2011 c840-1
10
We are repeatedly warned that the industry will find ways to circumvent the ban, and
payments for services are one way in which it might do this, so having the power to set
up regulations is, I agree, correct. I hope I have reassured the right hon. Member for
Blackburn that we have the mechanics in place to stop these referral fees continuing to
be paid under the guise of payments for services.
Jack Straw’s amendment to make breach of the prohibition a criminal offence was defeated
by 302 votes to 208. The Government’s amendments were added to the Bill.
The Bill had its third reading in the House of Commons on 2 November 2011 and will now be
considered by the House of Lords.
6 Consideration of referral fees by Select Committees
6.1 The House of Commons Transport Committee’s report
In May 2011, the House of Commons Transport Committee reported on the subject of motor
insurance premiums. The background to this was the very steep rise in premiums, up to
30% increases in some cases, recorded this year. The main reasons identified as possible
causes of this increase were: the cyclical nature of premium setting; the rise in personal
injury claims; insurance fraud and the incidence of uninsured drivers.
Not all of these factors were seen by the Committee, or by those giving evidence to it, as
being a Government problem, in the sense that there was a policy answer. However, the
rise in personal injury claims was thought to be an area where public policy had a role as the
Report explained:
11. One of the principal issues raised with us was the payment of referral fees for
business within the insurance market: for example, many solicitors pay a fee to
insurance or claims management firms in order to pursue a personal injury claim on
behalf of someone injured in a motor accident. The Association of British Insurers
referred to this as a "dysfunctional system". The Government is currently considering
proposals from Lord Justice Jackson to abolish or cap referral fees. Enterprise Rent-A-
Car suggested that the involvement in the market of claims management and credit
hire firms inflated costs because of under-regulation of these sectors. This was
disputed by the organisations representing firms in these sectors.
12. The Minister, Mike Penning MP, was clear that responsibility for the level of
premiums rested with the market, not the Government. He accepted, however, that
high premiums were problematic in various respect and said "there are measures we
are taking now which I feel will hopefully lower premiums, but I am not necessarily
doing it for that specific reason. I am doing it predominantly for road safety and justice
reasons". Witnesses broadly agreed with this view. None of our witnesses
suggested that it would be desirable for the Government to regulate the
provision of motor insurance so that premiums were lowered. Nevertheless,
there is scope for the Government to:
investigate the role played by legal and regulatory rules in generating the
continuing increase in personal injury claims relating to motor accidents and to
assess the impact of changing these rules on access to justice; 32
The Report summarised the workings and impact of the referral fee system:
32
House of Commons Transport Committee, The cost of motor insurance, Fourth Report, 2010-11, HC 591,
11 March 2011 pp11-12 (footnotes omitted)
11
24. Over 40% of personal injury lawyers pay referral fees to receive work from insurers
or claims management firms. Fees range on average from £200 to £1,000 per referral
and there can be several referrals in relation to a single insurance claim. Fees may be
paid and received by insurance firms, vehicle repairers, rescue truck drivers, credit hire
firms, claims and accident management firms, law firms and medical experts.
Swiftcover.com sent us evidence that some police forces charge fees for collecting
vehicles which are unfit to drive following an accident. ABP Club, which represents
vehicle repairers said "innocent policyholders are often 'encouraged' by their own
insurer to pursue a claim as their insurer will gain financially from this in the form of a
referral fee from the lawyer they pass the case to." It referred to this practice as a
"great merry-go-round with each insurer gaining at the cost of another insurer".
Insurers Aviva said that solicitors' marketing costs, including referral fees, can now
total as much as 40% of their base costs, which are reclaimable under conditional fee
arrangements. John Spencer of MASS said "there are large amounts of insurance
company income deriving from the very referral fees that are complained about".
25. Mark Boleat argued strongly that referral fees were a form of marketing cost and
did not add to overall costs in the insurance industry. APIL said "there are no
circumstances of which we are aware which would result in referral fees generating an
increase in insurance premiums".
26. Referral fees are another aspect of the Jackson review of litigation costs: he
recommended abolition or capping. Witnesses were divided over what to do about
referral fees, some agreeing with Jackson, at least in part, and others arguing that he
had got it completely wrong. Laurence Beck of the Claims Standards Council said
"some of the intentions [of the Jackson recommendations] are very good but I think
most of the good that will come out of Jackson happens already to be in place". It was
suggested that if referral fees were outlawed claims management firms would buy up
solicitors' practices.
27. The Legal Services Board's study of referral fees thoroughly examined the case for
and against the payment of such fees by solicitors, including the impact on costs and
the independence of legal advice. It accepted the view of its consumer panel that there
was not sufficient detriment to consumers to merit a ban on such fees but there were
concerns about transparency. The panel concluded that transparency "alerts
consumers to the possibility of conflict, counters pressure selling, encourages
consumers to compare prices to find the best deal and helps regulators to monitor the
market".
28. In our view, consumers are largely unaware of how much money moves around the
insurance industry when they make a claim, particularly if they were not at fault for the
accident. We suspect consumers are often confused about why their insurer insists
that they use a specific vehicle repairer or solicitor and about whether they are entitled
to make their own choice. The Legal Services Board has made recommendations
about the transparency of referral fee arrangements in the legal sector which we
consider should form the basis for a transparency regime throughout the motor
insurance market. Insurers should publish on their websites a list of the firms with
which they have referral arrangements, an indication of the level of the fees paid,
and a clear explanation of how referral arrangements work and their purpose.
Policy holders should be sent this information with their insurance documents.
When claims are made, insurers should make it clear to claimants that they need
not use the solicitor, vehicle repairer or credit hire firm which is recommended
by the insurer. We look to the insurance industry to implement a more
transparent regime for referral fees by the end of next year and to the
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Government to step in, with legislation if necessary, if the industry is unwilling
or unable to agree on this. 33
6.2 The House of Commons Justice Committee’s report
On 27 October 2011, the House of Commons Justice Committee published its report,
Referral fees and the theft of personal data: evidence from the Information Commissioner. 34
The Committee welcomed the Government's commitment to ban referral fees but considered
that the ban should not be limited to personal injury cases.
The Information Commissioner had given evidence to the Committee that, even in cases
where insurance companies had a clause in the small print of policies giving them permission
to pass data to lawyers, the practice might still not be legal.
The Committee noted the range of illegal behaviour that referral fees could reward, “from
individuals stealing data, to companies with contracts or practices which breach the [Data
Protection Act], to the sending of spam text messages to mobile telephones” and said:
“Clearly a system which makes criminality so profitable needs to be changed”. 35 The Justice
Committee concluded that banning referral fees, together with custodial sentences for
breaches of section 55 of the Data Protection Act, 36 “would have the twin effect of both
increasing the deterrent and reducing the financial incentives for these offences”. 37
33
House of Commons Transport Committee, The cost of motor insurance, Fourth Report, 2010-11, HC 591,
11 March 2011 (footnotes omitted)
34
House of Commons Justice Committee, Referral fees and the theft of personal data: evidence from the
Information Commissioner, Ninth Report 2010-12, HC 1473, 27 October 2011
35
House of Commons Justice Committee, Referral fees and the theft of personal data: evidence from the
Information Commissioner, Ninth Report 2010-12, HC 1473, 27 October 2011, para 12 (footnotes omitted)
36
Section 55 makes the knowing or reckless obtaining, disclosing or procuring the disclosure to another person
of personal data a criminal offence
37
House of Commons Justice Committee, Referral fees and the theft of personal data: evidence from the
Information Commissioner, Ninth Report 2010-12, HC 1473, 27 October 2011, para 14 (footnotes omitted)
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