Referral fee debate

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Following on from the Legal Service Board’s recent report into referral fees, which concluded that there was no evidence that referral fees caused consumer detriment, is the Legal Services Consumer Panel’s report which called for greater disclosure of referral fees and better regulation, but found that the payments do have a place in the legal services market and should be allowed to continue. The full story can be read on the Legal Futures website.

So, is this all good news for claimant solicitors who favour referral fees and a kick in the teeth for Lord Justice Jackson who wanted a ban? Hardly.

The really interesting part of the report commissioned by the Legal Service Board is the conclusion that despite referral fees in RTA claims being typically around £800 (where the solicitors’ recoverable profit costs will often be in the region of only £1,200), there is “no evidence of any detrimental effect on the quality of service arising from the payment of referral fees”. Read that quote again. Solicitors are apparently able to run typical RTA claims for around £400, presumably make a profit and with no drop in the quality of service. It is hard to imagine a finding more likely to strengthen Jackson LJ’s attempt to reduce costs to something more proportionate.

The report also explained that typical referral fees in RTA claims have increased from around £200 in 2004 to £800 now. This has been a transfer of profit from solicitors to third parties.

One argument in support of the continuation of referral fees is that it generates increased claims, through increased marketing activities raising awareness amongst the public, and therefore promotes access to justice. The basis for this claim in the LSB report was the upturn in RTA claims in recent years, despite the reduction in RTA accidents. The overall drop over the same period in relation to EL claims is dismissed out-of-hand by the report on the basis that EL claims are unconnected to referral fee generated marketing. The report, conspicuously, fails to mention PL claims. I therefore did their work for them and went back to the CRU data so see what that shows. For those interested, it can be found at Appendix 25 of Jackson’s LJ’s preliminary report. This shows a significant drop in PL claims during this period (although an increased success rate). If claims management marketing has had such a positive impact on RTA claims why has it had no positive impact on PL claims? It seems unlikely that there has been a significant drop in actual accidents during this period. Whatever the explanation is for the increase in RTA claims, it is unlikely to be related to referral fees in my humble opinion.

The referral fee game has simply resulted in a transfer of profit away from solicitors to third parties. I have no big problem with that, but surely the better response is to reduce fixed fees and hourly rates. The increase in the level of referral fees has been driven by what the market can bear. Reduce the Stage 1 and 2 payments for the new RTA Protocol to £400 in total and referral fees will disappear on their own. There will be no money to pay them.  And, with no “detrimental effect on the quality of service”.

Jackson hung out to dry?

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I had prepared a detailed post advising readers of the Legal Costs Blog which party they should vote for in the General Election. Unfortunately, due to a technical problem, the post did not appear. Readers will now have to wait for the next election before discovering my political views.

Professor Dominic Regan, in his blog, the day before the Election, wrote:

“I had a thoughtful note from Dominic Grieve QC last night. A Conservative administration is committed to serious costs reform and is interested in but not committed to the Jackson report. The Conservatives would move quite quickly on this.

Whatever happens tomorrow the reform of costs will not go away.”

So, where does the coalition leave the future of the Jackson Costs Report? Has a hung parliament left Jackson hung out to dry?

On Saturday, Regan posted an update confirming his view:

“The 219 distinct recommendations made by Sir Rupert Jackson are not going to be ignored by the new administration. … Reform will come.”

The political element was always the great unknown in the Jackson Report. At the moment, all bets are off.

Oh, OK then. My current prediction is the fixed costs proposals for fast track matters will make it through but not an end to recovery of additional liabilities.

Portal of Doom runs into problems

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The Law Society Gazette has reported problems on the launch of the new RTA Claims Process portal.  If only there had been some way to predict this.

Exclusive RTA Protocol Article

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We are always looking for interesting content for our readers and the Legal Costs Blog is absolutely delighted to have obtained an exclusive article from specialist costs counsel Kevin Latham and Mark Friston of Kings Chambers.

This article covers the new Road Traffic Accident Protocol.

This is the most comprehensive review of the scheme we have seen (and it is clear from a number of readers’  comments how much assistance is urgently required on these muddled new rules). 

Not only does this provide an excellent run through of the new scheme, but it identifies a number of problem areas which are likely to form the basis for the next round of the Costs Wars.  For example:

"There is a risk that less scrupulous claimants will make offers which are unlikely to be accepted by defendants, only to withdraw them following the total consideration period and thus obtain costs assessed on the standard basis when Part 7 proceedings are issued. It seems that the new regime offers the defendant very little protection from this potential abuse. The point is re-enforced as the defendant’s offer in the S2SP would appear not to attract Part 36 status (as an RTA Protocol Offer) until proceedings are issued under PD 8B and offers made within the S2SP are unlikely to comply with the formal requirements of CPR 36.2. It would thus seem that the only way in which a defendant can protect himself against this unsatisfactory position, is to replicate every offer made within the S2SP and subsequent total consideration period in correspondence as a fully compliant Part 36 offer in the event that the claim falls outside the Protocol at some future point."

This is invaluable reading for those dealing with RTA claims.  Read and circulate: RTA Protocol Article

We’re all doomed

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I am going to do something that does not come naturally to me. I have going to admit I was wrong. Worse than that, I am going to have to admit to being wrong about three things. This whole process is so traumatic that I am going to have to stagger this over several days.

I was wrong when I predicted that the new RTA Claims Process would not happen (see post) either because agreement would not be reached in relation to the rules or because the Jackson Costs Review would torpedo it.

Yet, here we are with the process due to launch today.

There are those who are already taking bets on how quickly the new "portal of doom" will crash.

I’m sticking with my other prediction that the process will produce a flood of satellite litigation, a view shared by Master Hurst who said at the Association of Law Costs Draftsmen’s AGM that the process is so complicated it would generate satellite litigation for "the foreseeable future".  So good news for law costs draftsmen and other costs professionals at least.

Costs draftsmen’s late Christmas present

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A number of readers no doubt work in the area of RTA claims.  Some at the front-end of the claims process dealing with the substantive claim, others at the tail-end of the costs side.  Hopefully, those readers will therefore be aware that we have a new claims process for low value RTAs starting on 6 April 2010 (and if they didn’t know they are in real trouble).

What some of the more observant may have noticed is that despite being only a few weeks away from the start date we still have no published rules as to how the scheme will work.  Quite how this shocking state of affairs arose is a mystery.  However, finally, some progress is being made.  The Ministry of Justice has written to a number of specific bodies:

“The Civil Procedure Rule Committee approved the drafts of the documents listed below on the 12th February 2010.  These documents are in draft form until: 

(1) the Statutory Instrument has been signed by the Civil Procedure Rule Committee and the Minister and then laid before Parliament, and

(2) the practice direction making document has been signed by the Minister and the Master of the Rolls.   

It is expected that the Statutory Instrument will be laid before Parliament by the beginning of March.  In view of the familiarisation, training and system adjustments that practitioners will need to undertake in order to be compliant with the new process we have decided [how gracious of the powers that be] to circulate these rules etc in draft form.  Please circulate to your members as appropriate.”

In case these haven’t yet made their way to you, the Legal Costs Blog and Gibbs Wyatt Stone have provided a link to all the draft documents here: RTA Claims Process.  Read them and weep.  No surprise that the final report in the Jackson Costs Review commented on the new process in this way: “I have two concerns about the new process in its present form.  My first concern is the sheer complexity of the process.  Over 80 pages of new material will be added to the rule book, in order to deal with the simplest category of litigation which exists, namely low value RTA claims where liability is admitted.  I fear that collectively these procedures might possibly open up a new theatre for the costs war.”

And that, of course, it the late Christmas present for costs draftsmen.  Jackson LJ may be intent on killing off the volume costs work but the Ministry of Justice, and those involved in formulating the new rules, have given it a massive boost.  

Time allowing, I’ll have plenty more to say about this new RTA claims process.   


Have defendants been stitched up?

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Before defendants get too excited about the positive recommendations that appear in Lord Justice Jackson’s final report on his Review of Civil Litigation Costs it is time for a reality check.  The first point to note is that we do not know which, if any, of the proposals in the report will be implemented or when this might happen.

Secondly, we do know that the new claims process for low value RTAs is due to be launched in April. Now at the time of writing, unless I have missed something, the actual rules have yet to be published.  This is worrying with the start date so close.  Jackson LJ clearly has doubts about the scheme which he expressed in his report: “I have two concerns about the new process in its present form. My first concern is the sheer complexity of the process. Over 80 pages of new material will be added to the rule book, in order to deal with the simplest category of litigation which exists, namely low value RTA claims where liability is admitted. I fear that collectively these procedures might possibly open up a new theatre for the costs war.”

Much has been made of the fact that the level of fixed fee is set below the average amounts recovered by claimant lawyers under the current rules.  Good news for defendants.  But, and it may be premature to start looking for problems before we have seen the final rules, one issue looks likely to cause defendants problems unless expressly dealt with in the small print of the new rules.

Under the current predictable costs regime, recovery of costs is governed by the level of damages actually agreed.  If a case settles at a level within the small claims track the predictable costs scheme does not apply.  However, under the new claims process the fixed fee of £400 for stage one, providing notification of the claim to the defendant, is payable at the point when liability is admitted.  At this point there will be no medical evidence.  The scheme is only meant to apply where the personal injury element of the claim is at least £1,000.  The Ministry of Justice’s report recognises that some claims may be valued at the outset as having “reasonable prospects” of exceeding £1,000 but it later becoming clear that they do not.  At that stage the claim will leave the process.  However, I can see no mention of defendants getting their £400 back.  Am I being incredibly cynical in thinking that there will be a very high number of claims that claimant lawyers value as having reasonable prospects of recovering over £1,000 only for these claims to undergo a surprising downwards revaluation or even disappear entirely after the £400 has been paid?  There is no time limit under the scheme for obtaining a medical report and defendants may only discover several years down the road that they have been stitched-up in tens of thousands of claims.

Legal costs news update

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Post Magazine has reported that a delay to the approval of the draft rules for the new RTA claims process means that the previous April 2010 implementation date will be postponed by at least a month.  Hopefully the rules will be published long before that because I am meant to be speaking at a Central Law Training conference on this process on 12th March 2010.  It will be an interesting day if the rules aren’t out by then.

More bad news on the fixed costs front comes from the Gazette that reports the failure of agreement in relation to talks aimed at fixing costs for all fast track claims.  These talks were instigated by Lord Justice Jackson as fixed fees for fast track cases are likely to form a central part of his final report.  The failure of the talks is no great surprise given the Association of Personal Injury Lawyers is so strongly opposed to an extension of fixed fees and even walked out of the talks at one stage.  As I suggested in a previous post, before they rejoined the talks: "If they simply wished to scupper the mediation, it would have made more sense to continue to play along and undermine the process from within".  APIL will now no doubt claim that the failure of the mediation is evidence that, despite their best efforts, an extension of fixed costs is a bad idea.

Cheaper personal injury claims?

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Recent articles in the Law Gazette have expressed concern about the practice of “third-party capture” where insurers approach accident victims directly in an attempt to agree damages without the involvement of claimant solicitors. Claimant lawyers argue that insurers try to settle these claims below their true value and that without their involvement justice will not be done.

On a related issue, I recently came across an article by David Marshall that produced a number of statistics in support of the view that an increase in the small claims track limit would be a bad thing as less people would be willing to bring claims without legal assistance. One of those statistics was from a MORI poll that produced the finding that “73% of respondents said that they would be unlikely to be able to value a personal injury claim without a solicitor”. What jumped out at me from that poll was not the fact that 73% of the public thought they would not be able to value an injury but that presumably 27% of the public thought they would. One in four members of the public think they are a walking Kemp & Kemp! Even I would have to concede there may be a certain amount of naivety here, but I may be underestimating the intellect of the great British public.

Claimant solicitors naturally try to paint this as all an or nothing issue. Either a solicitor is involved in the claims process from start to finish, in which case the client can expect to receive proper compensation, or the poor client is left entirely to the merciless clutches of the evil insurer who will under-settle the claim.

Third-party capture cases are, by their nature, cases where liability is not in dispute and the insurer wants to settle as cheaply as possible (at least so far as the legal costs side is concerned). Let’s assume in this situation that a medical report is obtained from an independent medical expert (at the insurer’s expense). The Claimant completes a standardised form containing information of any financial losses and produces evidence in support. Assuming the medical expert does not recommend further investigation, at that stage the insurer makes an offer in settlement. The Claimant then takes the evidence gathered to date to a solicitor and asks whether the offer made is reasonable. No more than a very short written advice would be needed. If an insurer has offered £2,000, a Claimant will not want to know more than whether this falls within a reasonable range of what might be allowed at court. A client will not require a detailed “legal” advice quoting numerous authorities in support. How much would this cost? £100? £150? If solicitors did not think they could provide a short advice for that price I am sure the junior Bar would.

If the advice is that the offer is too low then the Claimant can be told what an appropriate settlement range would be an go back to the insurer with a counter-offer. If agreement cannot be reached then it would be reasonable at that stage for solicitors to become fully involved. Obviously, serious injuries would have to be dealt with in a different way, but the idea that the current system is the only way that claimants can recover an appropriate level of damages in low-value claims, where there is no dispute as to liability, is simply untrue.  (Even under the new claims process for low-value RTAs, solicitors will still recover costs of £1,200 for cases where there is no liability dispute and quantum is agreed without a hearing.

You’re unlikely to hear APIL making similar proposals for reducing legal costs.


One-way costs shifting – The sting in the tail

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I recently received an email from someone who is writing an article for their university newsletter and wanted my views on the potential impact of the Civil Litigation Costs Review on defendant panel solicitors.  This is an interesting issue and one that, to be honest, I had not previously given much thought to.  Much of the Jackson Review, at least so far as it covers the type of work undertaken by defendant panel solicitors, is focused on controlling the costs that claimant lawyers incur, rather than those of defendants.  My previous posts on the subject have therefore focused on that aspect, rather than the impact on defendant firms.

Lord Justice Jackson’s Preliminary Report has, so far as is relevant, two main proposals.  These are the ones most likely to find there way into the final report. 
The first of these is extending fixed costs to all stages of the fast-track.  Although the Preliminary Report, so far as I can see, does not spell this out, it seems clear that it is intended that fixed costs would apply to claimant solicitors but not defendant ones.  If anyone is able to point me to something that suggests this view is mistaken, then please let me know.  This proposal would not, in itself, have any direct impact on defendant solicitors.  If my reading of the proposal is correct, and if only this change was made, it might lead to the strange outcome that defendant solicitors were able to recover more in costs than claimant solicitors.  That would be a first.
The more interesting issue is whether the extension of fixed costs would have an impact on claims behaviour which would, in turn, impact on defendant firms.  It is generally accepted that the introduction of the predictable costs regime encouraged some claimant firms to issue proceedings at the first opportunity to escape the fixed costs scheme (see page 126 of the Preliminary Report).  On the one hand, an extension of fixed costs might encourage some claimant firms to settle cases as quickly as possible, doing as little work as possible in the process, to maximise their profit margins.  This might reduce the number of issued cases and therefore have an adverse impact on the volume of cases being handled by defendant firms.  Conversely, some claimant firms might be encouraged to push cases to the next stages of the claims process to secure the fixed fees applicable to those stages.  This might, in turn, increase the volume of cases being dealt with by defendant firms.  Time will tell. 
If the claims process does become less adversarial, and claims settle more quickly and with less work, this may impact on what insurers are willing to pay defendant firms (much of the volume work currently being done under fixed fees agreements).  This may be of particular relevance for firms that offer claims management services for pre-litigation work.
The second major suggestion in the Preliminary Report is a move to one-way costs shifting (see previous post).  If Jackson LJ’s current thinking on this issue is correct (and this is a big “if”) this should be largely costs neutral from insurers’ perspective.  However, it might have an unintended consequence for defendant firms.  Traditionally, due to the downward pressure brought by insurers, defendant solicitors have charged ridiculously low hourly rates (I should know as this, in turn, impacts on what I can charge for defendant costs work).  In the past, defendant solicitors have therefore been able to only recover low hourly rates from their opponent when they secure a costs order.  However, in recent years there has been a growing trend for defendant firms to enter into discounted CCFAs.  Where the claim is not successfully defended the insurer will pay the typical low hourly rates (as before).  When a costs order is made in the defendant’s favour, the defendant firm can now (under the terms of the CCFA) recover costs from the opponent at the normal hourly rates appropriate for the case (usually Guideline Hourly Rates).  This has helped defendant firms in recent years to increase their profits.

However, if one-way costs shifting is introduced, defendant firms will be back to the position of only being able to recover the lower rates that insurers are prepared to pay (because there will be nobody else to pay).  Admittedly, it is only in a minority of cases that positive costs orders are secured by defendants, but defendant firms are likely to notice the difference when it comes to their bottom line.

Click image to enlarge:

qc mar 17 1998