The end of the problem or more of the same?

Referral fees have become a symbol of a dysfunctional personal injury claims market, currently spotlighted by a growing political interest, which resulted in a referral fee ban being added '“ belatedly '“ to the LASPO Bill. Alongside the ban, the government has signalled its intention to remove the fat in legal costs that fund the payment of such fees '“ with the initial focus seemingly just on the fixed fees under the RTA PI scheme. The government is pinning its hopes on the combination of both actions to drive a reduction in personal injury claim volumes and in the costs of paying out on these claims, particularly claimant lawyer legal costs, all to help provide some much-needed relief for premium and tax-paying consumers and businesses. Such a ban has been broadly welcomed, particularly if it serves to remove some of the more frivolous and suspect claims from the system, but there are big questions surrounding what this will actually mean for the industry in practice, and the lawyers on both sides of the fence.

Referral fees have acquired a demonic identity of their own in recent months but in reality they simply represent a route to market for the claimant lawyer '“ an acquisition cost by any other name. Irrespective of any ban, this need to contact and capture the claimant will continue, to feed hungry teams of well-leveraged paralegals within claimant lawyer businesses and to maximise the return from business models founded on volume: lower-value cases.

Much of the implementation detail remains unclear '“ not least, the ability of the various regulatory bodies to consistently manage ban enforcement and the level of residual costs recoverable, though it would be reasonable to assume that there will be some provision allowed for acquisition costs of work for claimant solicitors.

Equally many parties are addicted to the income earned from referral fees '“ a fix that may not be easy to give up. The timeline between the accident and making contact with the claimant is vital and has shortened dramatically, with much activity now focused in the 'golden hour' post-accident. The vast majority of personal injury claims currently attract a referral fee payment. With 967,000 claimants in the market last year and an average fee of £800, the referral-fee market is estimated to be worth at least £600m.

So, with a ban in prospect, how will the claimant lawyer respond in a market which may shrink in terms of personal injury claim volumes? Surely competition to get claimant leads will only intensify. Many claimant practices have invested heavily in people, IT and processes to create large-scale operations '“ these voracious claims factories need to be fed with sustained claim volumes to reward equity partners and, increasingly, external investors.

Notwithstanding any statutory ban, there may still be ways to contact claimants and look after those providing the all-important leads, albeit at reduced income levels to those previously enjoyed. Claimant lawyers could pay membership fees to secure access to banks of consumer data with a view to offering non-prescribed legal services, with personal injury claim conversions a by-product. The ability to make payments as 'consideration for the provision of services' offers another rich vein to keep the money flowing. It is hard to envisage that TV and other advertising channels will no longer be used by claimant firms when they have been so lucrative, and marketing teams will of course continue to develop new methods of talking to potential clients.

History repeating

Before March 2004 referral fees were banned, though various creative schemes existed to circumvent this. History will undoubtedly repeat itself as schemes take on various hues of grey, creating additional challenges for regulators.

So much depends on the level of recoverable costs post-ban but, with a reduced pot to fund acquisition costs, claimant lawyers will need to drive out further efficiencies in their businesses, for example via IT and offshoring, to try to secure loyal work sources and to sustain work flows. The larger companies will become more aggressive, and the smaller inefficient firms could be squeezed out of the market. Just looking at internal efficiencies though may not be enough.

Claims management companies are a large source of claimant leads and there will be attractions for claimant lawyers in keeping the value chain intact through the acquisition of such companies, particularly those that have a track record of quick claimant capture. Such an acquisition would mean that the hand-off time between the claims management company and the claimant lawyer can be minimised, reducing the risk that other parties could get in on the action and steal the lead, keeping more of the value in one place '“ helping to generate healthy returns for investors. Equally, claimant lawyers may be acquired by claims management companies or insurers for the same reasons.

The ban on referral fees is just one of a number of changes coming over the hill, impacting income levels for claimant lawyers. The opening up of the legal services market place will see some firms take the chance to broaden their offering beyond any front-end marketing acquisition, so that they can offer an end-to-end claims handling service to claimants, whether it be providing a hire vehicle or rehabilitation '“ all helping to manage their costs and profitability across a broader range of activities.

Many parties are closer to the claimant than the claimant lawyer in the initial post-accident period, such as insurers, brokers, repairers and claims management companies '“ and the payment of referral fees is today mainly leveraged off this food chain.

Go compare

Soon though, the claimant lawyer will need to look to his client for payment of any success fees. The expectation is that such fees will be competed over by claimant lawyers. With an increasingly IT savvy population who are used to comparing services and products, how long will it be before we see developments whereby the services of claimant lawyers can be compared based on criteria such as the average amount of compensation secured, the speed of damages recovery and success fee levels? This would inevitably be accompanied by direct consumer marketing and offerings which help to keep the work flowing in, whether it is shopping vouchers or a technology gadget. In reality these direct approaches will present another route to market, in effect cutting out the middle men.

What if claimant legal fees, whether fixed or hourly rated, were reduced so as to remove all of the costs currently used to fund referral fees? While such a development is unlikely, would claimant lawyers be content to rely on word of mouth or traditional service directories to secure work? Would the businesses close to the claimant such as brokers and claims management companies simply refer clients based just on quality and customer service factors or would they leave their customers to find their own lawyer? Or would the claimant lawyer decide to dig into the profit margin to find the acquisition costs required to keep funding the flow of work?

With the Ministry of Justice's initial, narrow focus trained just on the fixed fees under the RTA PI scheme, there is still a lot of money in the system to keep the wheels turning. If a claimant lawyer needs to find the money to pay acquisition costs, the drive for efficiencies and for diversification will increase, further changing the competitive landscape.

The work referral model, currently accompanied by the payment of fees, is deeply embedded in our claims handling system. The need to continue capturing claimants and processing them into the claimant lawyer operation will survive any referral fee ban, with this need likely only to be emphasised by the existence of any external capital. The party 'owning' the claimant is still king and is likely to still look for the best deal from claimant lawyers '“ whether through ownership or otherwise. Some claimant lawyers will move to get directly into this front-end acquisition space to secure inflows of work, reducing the risks of dependency on sources of referrals.

However claimant firms respond to the ban, regulators are likely to be busy enforcing their standards, but with no consistent approach to managing such enforcement on the table and with acquisition costs, albeit reduced, still in the system, it largely feels like more of the same.