Through the maze: Richard Cohen examines the new ban on referral fees

This article was published in Association of Personal Injury Lawyers magazine in July 2013

Richard Cohen croppedSince the ban on personal injury referral fees was introduced through the Legal Aid, Sentencing and Punishment of Offenders Act (LASPOA) on 1st April, a number of models have been touted which supposedly find a way around the ban and comply with the new legislation. There is, however, a general lack of confidence among law firms that these workaround solutions are actually lawful. This uncertainty has been fuelled by statements made by the Solicitors Regulation Authority (SRA). The body’s chief executive Antony Townsend indicated last week that ‘quite a number’ of arrangements investigated since LASPO came into force have ‘been on the wrong side of the line’ and that an enforcement strategy is in place.

These concerns  are forcing many firms into inertia, and resulting in firms working on their existing files, and running down their current case load. To do otherwise would be to risk an SRA investigation with all that entails for law firms. These firms report that their staff are increasingly demoralised, and rightly so. Without a viable solution in place and with many firms lacking the resources to market to clients direct there is little prospect of being able to make up the same level of personal injury cases. This will mean redundancies as firms streamline and cut costs.

Claims Management Companies (CMCs) are also uncertain that the models they are operating are compliant and they are unable to persuade law firms to take work from them. While law firms are able to stave off the reckoning by working through their existing cases, CMCs are already seeing their business model disintegrate.

Both CMCs and law firms are crying out for a compliant method of working together. But while larger providers are able to enter into an alternative business structure or joint venture to overcome the referral ban, these arrangements involve too much regulatory complexity for smaller providers to navigate.

Similarly, fee sharing arrangements and Damage Based Agreements (DBAs) between law firms and CMCs place the latter at a disadvantage. In both cases, the CMCs share is arrived at the end of the case, but CMCs need up-front money to fund their marketing costs. In any event, the indications are that DBAs will not generate enough in costs to be attractive to firms. Joint marketing plans between solicitors and CMCs have also been suggested as a solution but these run the risk of falling foul of the SRA.

The way forward

Where might a suitable solution lie? Having sought advice from Andrew Hopper QC, our reading of the LASPO legislation is that the heart of the problem appears to be which party is delivering information to a law firm; the introducer or the client directly. Consider two scenarios. In scenario one, an introducer such as a CMC is paid for telling a law firm about a client. This would be a prohibited referral fee under LASPO, since the person providing the information to the firm is not the client. But if, in a second scenario, an introducer is paid for telling a potential client about a law firm (and the law firm is in fact instructed), then in Andrew Hopper’s view, this would not be prohibited. The critical point here is that ‘any information provided to a law firm about a potential claim for personal injuries is provided by the client, and not by any third party’. In this scenario, the client is the one in control. Information is not submitted to the firm until the client chooses to do so.

This opinion is reflected in the SRA’s guidance from March this year, which gave the example of a website which finds suitable law firms for members of the public and provides clients with their contact information. The SRA indicated that this would not amount to a referral ‘as the potential client’s details are not being provided to the firm’ by the website. In other words, the system is more a recommendation system than a referral system.

So possible routes for solicitors and CMCs to continue working together do exist. After all, without a solution the smaller firms and CMCs are likely to go out of business. This will mean that the personal injury market is likely to consolidate, with work concentrated in a smaller number of very large bulk providers. And the likely result for consumers will be less choice, and worse commercial terms, than they were able to obtain before LASPO came into effect.

Richard Cohen is a solicitor and Executive Chairman at Epoq Legal Ltd