Referral fee prohibition “might never work”

September 5, 2012

The decision by the government to prohibit referral fees may not work according to the Solicitors Regulation Authority. – Referral fees are made by some solicitors to insurance companies and claims arrangement companies to find claimants for personal injury business.

The government will ban all referral fees from April 2013 when the Legal Aid, Sentencing and Punishment of Offenders Act (LAPSO) comes into effect.

Referral fees have been widely cited, particularly by the insurance industry, as one of the reasons for a rise in personal injury cases and an increase in insurance premiums.

The SRA, which regulates 120,000 solicitors across the country, has said that the law may not actually work as there are too many other ways that a fee can be paid which basically does the same thing as the referral fee.

The executive director at the SRA, Richard Collins, said that the vast majority of solicitors would take heed of the changes in the law straight away and opt for compliance, but that wouldn’t stop business as a whole finding a way to innovate.

He said that he thought that claims management companies would find ways of doing business that was compliant with the new law but would basically do the same thing.

Referral fees were introduced in 2004 by the then Labour Government and it is thought that the change led to a rise in the number of smaller injury claims being processes as a result.

The insurance industry has claimed that the increase in the number of claims has caused a rise in insurance premiums which are now topping £1000 a year for an average sized vehicle.

The SRA has aid that one of the results of the ban on referral fees was the possible rise in ABSs or “Alternative Business Structures” These would be entities that were owned or merged with a claims management company and would offer the same personal injury services as a traditional personal injury solicitor. The creation of the ABS would mean that the claims management company could still do business in the same way as before but wouldn’t need to pay a referral fee.