The Solicitors Regulation Authority says that the Government’s plan to ban referral fees in personal injury compensation cases in an effort to reduce personal injury claims volume may end up having unintended consequences.
Referral fees, which are paid to insurance providers and claims management companies by personal injury solicitors in exchange for the personal details of individuals who have been involved in accidents with bodily injury, are thought to have been driving up premiums through higher compensation costs associated with more injury claims. However, the SRA says that properly enforcing a ban on referral fees will have a much wider social impact than Whitehall is hoping to achieve.
Referral fees were first made legal eight years ago at the hands of the Labour government at the time, which helped contribute to a claims management industry boom. Meanwhile, personal injury claims costs have doubled over the past decade to a new high of £14 billion, prompting the Government to push through the new Legal Aid Act as a way to curb these growing costs by banning the payment of referral fees.
Personal injury lawyers made about £1.8 billion from the sector last year, aided by the data collected by paying referral fees. Meanwhile, the NHS alone paid out £1.3 billion in compensation payments, up by nearly 50 per cent from the previous year, but the SRA has cautioned that there will be difficulties determining and investigating if money is changing hands in the payment of referral fees, since firms often provide many different services such as vetting of claims, advertising, and marketing, and could very easily simply rename their referral fee to reflect one of these other services instead.
Firms may also seek to circumvent the ban by forming n Alternative Business Structure, the SRA said. A claims management firm, for example, could easily take on their own legal team or merge with an existing law firm to create an ABS, eliminating the need to pay a referral fee between the claims management company and the solicitor firm since they’re now both part of he same business structure – an arrangement that many claims management firms have begun to exploit, the SRA added.