The Rise and Fall of Referral Fees!

Sometime in the early 1980s I was visited by a rather shady looking character who offered to introduce claims for victims of defective pavements. He showed me an impressive portfolio of photographs of clearly dodgy flagstones with measurements. He said that he would send clients with portfolio on the basis of a payment of about £20 a go. Well back then I would have been less shocked if he had asked me to streak down Matthew Street on a cold February morning. Paying for work?? Back then you could not even put an ad in yellow pages.

Things then changed with the development of marketing co-operatives after the advertising ban was lifted. Groups of law firms would be invited to pay a regular fixed amount towards advertising and, for example, would get all the claims for a particular post code. In really this was paying for introductions. Other similar schemes began to spring up and in 2004 - yes as recently as that - the previously unthinkable happened. Solicitors were allowed to pay for work. It is fair to say that since then the referring of cases has become an industry. Some law firms have seen massive growth entirely on the basis of buying in work. Claims Management Companies (CMCs) which gather and sell claims have become big businesses. Insurance Companies have begun to generate income by selling cases to solicitors.

Whether all of this is a bad thing has been debated ever since 2004. The Law Society favours a ban. The Legal Services Board does not - on the basis that there is no damage to consumers. It has certainly increased the number of claims. But despite the myth of Compensation Culture - does anyone involved in personal injury work see it as anything other than a myth? - There has always been a low uptake of claims by victims of accidents and, especially, Medical Negligence. So to that extent there has been some good. On the other hand the idea of compensation claims being promoted by CMCs as a route to a good holiday rather than justice for injury is less attractive!

Announcing the proposed ban minister Jonathan Djangoly said - 'The no-win no-fee system is pushing us into a compensation culture in which middle men make a tidy profit which the rest of us end up paying for through higher insurance premiums and higher prices.' Note again the predictable and tired reference to the fantasy of a compensation culture. But it is the removal of the middle men that is the main focus.

This does however raise a number of interesting issues -

• What about voluntary bodies, charities and trade unions who have been able to assist victims for no profit but will now have their future existence threatened by the inability to seek a contribution towards their running costs from law firms? This is a price that lawyers have been happy to pay so only the victims suffer.
• Will a ban on referral fees reduce claims? This is highly unlikely. Sometime in 2012 we will see the introduction of alternative business structures (ABSs) enabling non-lawyers to have a controlling stake in legal service providers. So a major CMC can set up its own ABS, employ lawyers and carry on as before by outsourcing work to other firms on a costs sharing basis. It has become such an industry that creative businesses will find a way...
• What actually constitutes a referral fee?? Will any ban include contribution to marketing costs? Corporate entertainment? Admin fees? As ever the rhetoric and the detail are two very different things.

I am not here to defend referral fees.  There is a lingering concern that companies have become wealthy on the back of claims 'farming'. In the real world I suspect that the ban will not change things greatly. I would rather see a debate around the serious shrinking of access to justice. The rhetoric around compensation culture is a serious problem. Why should the parents of a child who suffers massive brain injury at birth due to a doctors' negligence have to justify the pursuing of a claim for compensation? Why should the state not give that child full support through a legal aid system that ensures excellent and specialised representation? Our system is not perfect. But the scandal of depriving victims of justice is a bigger issue than whether lawyers pay for work. It is a shame that talking about referral fees, no win no fee and a compo culture is all that the government and the media seem interested in.

By Steve Cornforth - Senior Partner