Government ban on referral fees - will this affect you?

Updated September 2011

The background

On 9 September 2011, the Ministry of Justice announced on its website the Government's commitment to curbing the growing compensation culture through banning the payment of 'referral fees' in personal injury cases and changing the rules on Conditional Fee Arrangements (CFAs).

The Government has put forward proposals based upon two key reviews:

• Lord Justice Jackson's Review of Civil Litigation Costs and subsequent consultation carried out by the Ministry of Justice in November 2010; and
• Lord Young's report entitled 'Common Sense, Common Safety' (October 2010).

Lord Justice Jackson recommended that the payment of referral fees for personal injury claims should be banned. He added that, should the government choose to take this proposal forward, they should consider extending this ban on referral fees to other areas of litigation.

The proposals are to be set out in Part 2 of the Public Bill; the Legal Aid, Sentencing and Punishment of Offenders Bill (2010-11) (LASPOB), which is designed to reduce civil litigation costs overall and to rebalance the potential cost liabilities of claimants and defendants. 

The major changes tabled are:

• Preventing recovery of a success fee, included as part of a CFA, by the claimant as part of a costs order.
• Requiring any success fee to have a maximum limit. This cap will be set by the Lord Chancellor and is likely to be 25% of damages awarded.
• Preventing the recovery of insurance premiums taken out to cover legal expenses, including After the Event Insurance (except in specific circumstances).
• The increase of damages awarded, by a suggested 10%, to cover the costs of a success fee.
• The introduction of a ban on referral fees in personal injury cases.

Timeline

The LASPOB is currently being debated by the House of Commons Committee, which is expected to report back to the House on 13 October 2011. Whilst a Ministry of Justice spokesman has been quoted as saying that there is no fixed date for enactment of the Bill, the proposed implementation date is 1 October 2012.

What this means for businesses

The Government has decided to take a hard line in tackling what it describes as the current "compensation culture." It has indicated that, at this stage, a ban on referral fees will be limited to personal injury cases. However, it should be noted that Lord Justice Jackson recommended an extension into other areas of litigation and the Law Society is currently lobbying the Government to extend the ban more widely.

Practically, this means that insurers, intermediaries and claims management companies will no longer be able to solicit, pay or receive payments for referring their customers to solicitors or providers of other services in personal injury cases.

It is not clear, at this stage, what form the ban will take and there remains some debate about the difficulty of producing a comprehensive definition of 'referral fees'.

However, the Government has indicated, in a Commons debate session on 13 September 2011, that it will take a robust approach to enforcing such a ban, and in particular, punishing those businesses and individuals who try to circumvent the ban through rebranding fees as 'other costs' or starting an emerging market in black market fees.

Former justice secretary, Jack Straw, in a Rule Bill to the House of Commons, has indicated that he would like to see infringement of the ban be made a criminal offence and see flat fees paid by insurance companies to legal providers significantly reduced.

If these proposals affect your business or you would like advice in relation to this article, please contact Suzanne MacDonald.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

TLT LLP is a limited liability partnership registered in England & Wales number OC 308658 whose registered office is at One Redcliff Street, Bristol BS1 6TP England. A list of members (all of whom are solicitors or lawyers) can be inspected by visiting the People section of this website. TLT LLP is authorised and regulated by the Solicitors Regulation Authority under number 406297.