Rolling the Jackson dice: is there a future for independent personal injury firms?

The Jackson reforms will not destroy independent personal injury law firms, but those who want to stay in the game must accept the rules will be very different from what they are now, says David Marshall

The impact of the Jackson reforms on the claimant personal injury market has been seismic. 'Jackson' is used here as a convenient shorthand for a combination of the recommendations arising out of the Jackson review and the government's own changes, notably the implementation of portal extension vertically to £25,000 and horizontally to include employer's liability accident and public liability accident claims. Few of these reforms have much immediate financial effect: the new proportionality rule does not apply to any '¨work done before 1 April, or at all to cases'¨issued before 1 April, and the portal extensions largely apply to accidents after 31 July, as do the new fixed costs in the fast track. It might therefore have been expected that the market impact of the reforms would be delayed. This has not been so.

The combined impact of the reforms will eventually lead to a significant reduction in fees earned by lawyers acting for the victims of personal injury. All admitted injury cases under £25,000 will remain within the portal. The fee for the most common type of claim - low value admitted road traffic accidents - was slashed from £1,200 to £500.

Those cases that escape the portal, whether because of insurer inertia or because they are defended (including allegations of contributory fault other than seat belts) will go into a fast track with fixed costs. Although, unlike the portal fees, there is some rational basis for these fixed costs (namely Fenn and Rickman's analysis for Jackson), these fees have been cut by £700 across the board. This is to reflect the government's estimate of the cost of referral fees for such cases. There is no allowance made for any other cost of work acquisition. In addition, success fees are no longer recoverable as costs from the opposing party. Although there is not yet any real sign of market pressure operating to reduce success fees, the statutory cap of 25 per cent of general damages and past loss will anyway impact to reduce the success fees earned, particularly in risky but lower-value cases such as trips and slips. On top of all this there are, for the multi-track, still lurking the icebergs of proportionality, budgets and the review of guideline hourly rates. The best current estimate is perhaps a reduction of about 33 per cent in fee income across the board, which would have a huge impact on any sector.

Mixed model

The vast majority of claimant personal injury firms operate with a mixed model which reflects the overall market, namely a book of mainly lower- value claims, most of which are liability-admitted and/or settle pre-issue, with a few more substantial multi-track cases. Most firms are still solicitor led, although most also use paralegals, particularly for the lower-value work. Although not all paid 'referral fees', claims management companies and collective marketing schemes were widely used to source work. The ban on referral fees for personal injury under the Legal Aid, Sentencing and Punishment of Offenders Act 2012 was just one prong of the insurer-driven government attack; the other prong was economic, the reduction in recoverable fees. Most traditional firms now face a crisis both of structure and of the lawful and economic sourcing of work.

Personal injury work is not cash generating either immediately or while the business grows - instead, it eats cash through fees deferred to the end of the case and the practical requirement to fund disbursements while it goes on. Even before the reforms financially affect firms, banks spooked by law firm failures (even though mostly not yet in the claimant personal injury field, it has to be said) are restricting lending to the sector, causing immediate cash-flow issues.

Reaction so far

The market reaction so far has been threefold. First, there are simple aggregation strategies. Businesses with access to capital, usually outside the traditional law firm sources of bank borrowing and partner cash, are using that capital to acquire work and work sources. Slater & Gordon, listed on the Australian Stock Exchange, have been particularly active. The plan seems to be to build significant scale of operation and to develop a consumer brand. Partners in the acquired firms are relieved of partnership borrowings, realise their own capital (including that invested in work in progress), and have the chance of participating via shares in the future model. It seems likely that this model will be highly corporate, using scale to enable margins to be made on all work generated.

Second is the Quindell approach. AIM-listed, this group sees claimant personal injury work as one facet of the insurance services industry. As well as claimant law firms, they have acquired medico-legal report providers, rehabilitation services, vehicle repair and a consumer brand. They recently announced their plans for a full listing next year and their aim to become "a £1 billion business" in this space. Minster Law is one of the largest specialist volume personal injury outfits. It was recently taken over by BGL Group, owners of Compare the Market and other insurance businesses. Other claimant law firms have announced proposed ABS models with insurers. These models deal with the legal ban on referral fees by maintaining case acquisition within a single ABS with profit-sharing replacing payment of referral fees.

Thirdly, some firms are entering the market to buy books of business (largely pre-April 2013 caseloads) at a discount to the value of work in progress, allowing an exit route for firms looking to get out of personal injury altogether.

Expertise and reputation

So where does this leave the independent law firm? It will be very difficult for smaller businesses to economically acquire or transact the lower-value personal injury work in future. Even if solicitor and client charges are made, the damages paid for the vast majority of personal injury actions are relatively small and there is little room for solicitor and client charges to make up for the losses in recoverable costs.

Mark Stobbs, director of legal policy at the Law Society, recently commented that he thought that "there could be just five or six giant claimant personal injury law firms in three years' time". That may be overstated, but further aggregation is inevitable. And Andrew Twambley of Amelans and Injury Lawyers 4 U has said that "sausage machines and client care don't fit together, service has to go". But in today's consumerist society is this really an option? The consumer expects both low prices and top service. Whatever may be said about the large-scale "sausage factories", customer care is usually a high priority, even if high-quality legal input is reduced.

Go niche

The position is rather different for the smaller number of high-value cases and specialist practice areas. Individual reputation and expertise carry more weight with potential clients or referrers. '¨And notwithstanding the impact of the '¨multi-track Jackson reforms, this work will be better remunerated. There is also more scope for clients choosing to pay for genuine expertise which may add significant value (whether this is achieving liability at all or in maximising the value of the claim).

Niche practice areas are likely to be more '¨fruitful areas of practice for the independent law firm. Success in this market, though, will depend on genuine expertise and development of reputation. This will never be a household brand, but it is perhaps debatable how far law firms can ever really be household brands, bearing in mind that most legal services remain distress purchases. '¨It is also not straightforward running a commoditised volume business alongside a specialist premium service, although a few law firms have managed this.

The other niche route for the independent law firm is the local approach. It is surprising how a strong local presence is still valued by much of the population despite the growth of online services and even though very few legal transactions actually require many personal face-to-face meetings (and even when those can be conducted at the client's own home).

Civil litigation has been a significant '¨contributor to the success of many independent law firms over the last five years, replacing much of the non-contentious transactional work which fell away after the financial crisis of 2008.

Law firms need to examine carefully the developments in the personal injury field. This will affect many firms directly and may well drive developments elsewhere.

There is little doubt that alongside the mega-firms with national brands, there will be an independent market in future, but this will look very different from today. SJ

 

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David Marshall is managing partner at Anthony Gold Solicitors

 

 

 

 

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