Why the government is really banning referral fees (clue, it's not for consumers)

Since the government’s wholly unsurprising announcement that it is banning referral fees I have been wondering what I can write about this that hasn’t already been said (including by me in an earlier post). I’m certainly not going to attempt to explain the impact it will have on personal injury lawyers and claimants because I am not sure I really know.

And I’m not going to spend ages ranting on about how I don’t believe there is a compensation culture gripping Britain, because even if there isn’t, the fact that people think there is one is probably damaging enough.  Although I do wonder where all the claims are coming from if everyone, from politicians, to insurers, to journalists, to risk managers, Daily Mail readers, the cabbie and his dog all think it’s wrong to make one.

Instead, I am going to indulge in a little vested interest spotting.  With the massive caveat that, of course, I am totally biased in favour of the consumer and access to justice and can be counted upon to say a few unpleasant things about lawyers.

In the first place, if referral fees are so awful, why not ban them across the board, as the Law Society has called on the government to do?  I find it very hard to see how they can be so bad for consumers in personal injury cases but be fine and dandy in conveyancing.  This is, of course, because it has nothing to do with consumer detriment at all.

Earlier this year the Legal Services Board’s review of referral fees found ‘insufficient evidence of consumer detriment to justify a general ban’.  It did say there needed to be a ‘step-change in transparency and enforcement to improve competition and guard against abuse’.  But this isn’t the same thing as a ban.  I suspect this is at least in part because the LSB recognises that enforcing a total ban would be difficult (particularly given there is no accepted definition of a referral fee) and only drive the practice underground, reducing transparency.

It’s a shame the government doesn’t have this foresight, although I suspect there is a very good reason why they don’t.  I fear the government have been hoodwinked by a powerful insurance lobby that has somehow managed to convince them that banning referral fees and, inevitably, reducing the fixed fees solicitors get for personal injury cases, will end the ‘no win no fee racket’ and reduce motor insurance premiums.

It was surely no coincidence that the government’s announcement was a day after the Office of Fair Trading (OFT) announced an investigation into car insurance premiums.  The OFT’s investigation will not look at the compensation system, but rather at the role of price comparison websites, credit hire vehicles, approved repairer panels and ancillary products (such as legal protection).  All the same, the government has pre-empted this investigation by suggesting that referral fees are the reason premiums are so high and promptly banned them.

As you would expect, I am firmly in the cynics camp when it comes to watching what the insurers will do following a ban.  Their argument, I suppose, is there will be fewer accident claims and so fewer payouts.  But people won’t stop getting injured just because there are no referral fees.  So how will insurers make up for lost referral fees?  Yes, you guessed it, by putting up premiums.  They really have us over a barrel.

Many lawyers don’t like referral fees either, which is understandable given they are generally the ones paying them, although the objection is more a general distaste about paying for work.  But lawyers have to accept some of the blame for the current system and the rise of claims management companies.  They don’t just exist because they are allowed to.  They flourished because they improved access to justice for claimants and are, on the whole, more customer focused and consumer friendly.

I have to agree there is something inherently distasteful about buying and selling injury cases.  But what I find even more distasteful is the posturing and language used on all sides in this debate.  Provocative language about lawyers ‘marking up’ costs on no win no fee cases, insurers being ‘forced’ to raise premiums and adverts and text messages ‘inducing’ people to claim gives the impression that claiming at all is dishonest.  This conveniently ignores the very purpose of the compensation system:  access to justice for people injured in accidents that weren’t their fault.

I am quite sure this is really all about insurance company profits.  Insurers don’t give a tuppenny damn about the injured person, or they wouldn’t contest as many cases as they do and would pay out sooner.  And they certainly don’t give two hoots about consumers since their masters are the shareholders, whose interests are increasing profits by reducing payouts and keeping premiums as high as the market will tolerate.

And I am quite sure the government cares nothing for access to justice.  In the very week that the Ministry of Justice made its headline-grabbing referral fee announcement, the committee considering the legal aid bill steamrollered over every single proposed amendment, without a single concession.  Government members of the committee were accused of failing to engage with arguments and simply resorting to prepared statements.

This is the bill that will remove legal aid for thousands of the most vulnerable in society every year, including those with medical negligence claims, and which could force many law centres and citizens advice bureaux to close.  Compared to the impact this bill will have, banning referral fees, whether you are in favour or not, is just a diversionary tactic.  Small fry.  What the government is proving is that it has little concern for access to justice and much more for the bank balances of its friends in the city.