No win, no fee, no way

Ken Clarke's statement to MPs presented the proposals for the reform of the civil justice system as a coherent whole endorsing Lord Justice Jackson's report on costs in civil litigation (see News, page 3, and solicitorsjournal.com/litigation). It seemed to chime with the point made by Jackson LJ that his recommendations would only make sense if implemented en bloc, that there would be no cherry picking. Referral fees and the regulation of claims management companies, however, have been left outside the scope of the reform.

Sadiq Kahn, a former solicitor and now shadow justice secretary, was the first to question this omission, saying the plan had not taken into account Jackson LJ's view that 'his proposals are a package and should not be subject to cherry picking'.

A more direct attack came shortly afterward from Sir Alan Beith, LibDem MP for Berwick and chair of the justice committee, who is currently scrutinising the legal aid reforms.

'Given the Lord Chancellor's characteristic willingness to take what in Yes, Minister would have been called 'courageous decisions' about success fees, insurance fees, after-the-event insurance and the scope of the small claims courts, will he tell us what he thinks about referral fees and claims farming, which are probably major contributors to the compensation and litigation culture?' Sir Alan asked.

The justice secretary acknowledged the concern, saying it was 'an important area that we should look at', but justified his decision on the ground that 'the Legal Services Board is looking into that whole area'.

He confirmed the government's disapproval of claims farmers, referring to them as 'a rather extraordinary form of practice' that had 'developed at the margins' of the no win, no fee mechanism. For the benefit of listeners who may not have heard of claims farmers, he then proceeded to answer Beith's question by providing a description of how the system worked.

Clarke's predecessor in office, Labour MP Jack Straw, carried on the questioning, calling on the government to close down 'those parasitic claims management companies' and for a ban on insurance companies selling claimant details to claims farmers without the agreements of the individuals concerned.

Clarke responded he had heard that insurance companies were selling claims but that not all of them did. He acknowledged 'the huge cost' this had for institutions such as the NHS but did not suggest that the issue should be tackled in the proposals he was about to table to parliament.

At this stage of the consultation it appears that the government will leave the question of claims management companies to be dealt with separately. This, some lawyers say, is the biggest flaw in last week's proposal.

Primary focus

Des Collins, senior partner at Collins Solicitors, says claims farmers should be the primary focus of the proposed reform, with new rules introduced to regulate the sector.

Collins, who has represented train crash victims and has been acting for the claimant families in the ongoing Corby case, says the payment of referral fees between claims management companies and insurance companies is only one issue. 'Insurance companies also cold call potential customers after, for example, a car accident, suggesting that money will be paid to them if they make a claim even when they are aware that the policy holder was not in the car at the time,' he says. This, he continues, has a pernicious influence on the system and exacerbates the compensation culture myth.

'Claims farmers have received no treatment whatsoever in white paper and if they continue to operate as they do the system isn't going to improve,' he argues.

Collins's view, which is shared by many claimant lawyers, is that deserving cases will, as a result, fall by the wayside. 'Claims farmers give the profession a bad name and lead to abuse of the system; we all know it exists but the white paper has deliberately chosen not to tackle the issue,' he says.

Ken Clarke's response to such concerns appears to be that the new rules would reset the clock, leading to claimants going directly to solicitors. This may be so up to a point, but Collins is unconvinced that without legislation to restrict claims farmers and referrals the market will not change. 'The cap on success fees and the ban on the recoverability of insurance premiums will reduce the activity of claim farmers but not to the effect they will not be viable,' he comments.

'Claims management companies will increase the volume of activity and cases will be conducted at lower levels but they will go on,' he says. 'Their business will remain profitable through increased turnover. Claimants will receive only a basic service, which is a disservice to the law and the profession.' The result, according to Collins, is that it will lower claimant and defendant standards, turning the legal process into a mockery.

Ian Shovlin, senior partner at Higgs and Sons, in the West Midlands, is equally surprised that the government would have left the question of claim farmers to the regulatory bodies. 'It's a startling omission,' he says. 'Referral fees need to be policed far better than they are; they need to be transparent and open.'

According to Shovlin, the implicit delegation of the issue to the LSB suggests that the justice minister sees it as too politically sensitive. But he is more hopeful than Collins that new rules on the recoverability of premiums and success fees would stop claimants using claims farmers.

One likely consequence, he says, is that ATE will gradually disappear, to be replaced by before-the-event insurance. BTE policies with no or low referral fees would become the norm, not just for car or home insurance but also for businesses '“ just as it is in a number of European countries. Referral fees would also become less common, taking the sector back to the pre-1990s era where referral fees and ATE were unlawful.

But this could throw up an interesting dilemma for insurers, Shovlin says. 'If a client is referred to a solicitor by an insurance company under a BTE policy in return for a fee and the claimant is awarded damages out of which the firm pays itself, isn't that a referral fee by another name?'