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The Ministry of Justice (‘MOJ’) has today announced its decision to ban referral fees in personal injury litigation, as part of its campaign against the perceived “compensation culture”. Inevitably, this is likely to have significant effects on the legal expenses insurance industry.

The MOJ believes that the cost of utilising the services of Claims Management Companies (‘CMC’) increases the claims cost that liability insurers have to pay out and that insurers therefore shift this cost onto consumers, by increasing their insurance premiums.

One of the major beneficiaries of referrals fees is the Before the Event (BTE) legal expenses insurance market, which distributes claimants to panel firms in return for referral fees. This practice is not popular with many claimant law firms as they find themselves losing instructions to panel firms as a result of the BTE insurer’s financial incentive to refer cases onto their own panel.

However, the ban will inevitably lead to an increase in the cost of BTE cover because the prices have been artificially depressed for years, due to income generated from referral fees. This will likely kill off any lingering hope that BTE is capable of filling the access to justice vacuum left by scrapping recoverable After the Event (‘ATE’) premiums. This was Jackson LJ’s ambition for BTE; a view that was widely ridiculed as unrealistic because the take up rate for BTE insurance, even at the currently depressed prices, is insufficient to help those that rely on the recoverable regime.

Perhaps the Government should reconsider its position on ATE premium recoverability. Perhaps it should put its faith in the strong filtering carried out by ATE insurers and good quality local CFA lawyers. Surely this produces a better financial outcome for liability insurers than furious claims farming driving down quality and maximising quantity due to the supremacy of the referral fee.

SUMMARY OF OUR OPINION

• We agree that society will be better off if solicitors regain control over client acquisition without competition from CMCs
• We also agree with the transparency that will be achieved in the legal expenses market if BTE insurers rate their premiums against the cost of providing the cover instead of selling claims
• The Government should move to halt the proposed reforms to scrap recoverability of ATE premiums as a result of their announcement on referral fees, in order to address the glaring contradiction that running both reforms in parallel creates (amongst other reasons)
• Perhaps the Government expect BTE insurers to simply buy law firms as part of the ABS revolution so some form of cross-subsidy may creep back when BTE insurers are also paid for running the litigation themselves.