The ban on referral fees in personal injury cases

Transcription

1 The ban on referral fees in personal injury cases Response of Browne Jacobson LLP to consultation of 23 October L

2 Contents Executive Summary... 3 Contact details... 3 Introduction... 4 Responses to the discussion document... 4 Lack of Clarity under LASPO... 4 Burden of Proof... 5 Alternative Business Structures... 6 Joint Marketing/advertising... 7 Equality Impact Assessment... 7 Proposed Changes to the SRA Handbook... 7 Draft Guidance... 8 Draft Supervision and Enforcement Strategy... 9

3 Executive Summary Thank you for offering us the opportunity to comment upon your proposed rule changes to incorporate the ban on referral fees ( the ban )under the Legal Aid Sentencing and Punishment of Offenders act 2012(LASPO) into your regulatory regime. You have not set out specific questions and so we have structured our response to correspond with your consultation paper. We have not commented on your proposals save where we disagree or where we consider additional matters should be considered. We have dealt with points as they arise in your paper, and have not repeated views already given. Therefore many of our views are found in the section responding to your comments on the discussion document, but are also relevant to other parts of the paper. This response does not comment upon the appropriateness or otherwise of the referral fee ban to be introduced under LASPO. Instead, our focus is upon ensuring that any ban which is introduced is effective and enforceable, and does not adversely impact upon the legal services market or access to justice. Contact details We will be happy to assist with any queries you may have arising from this paper and would welcome the opportunity to contribute to subsequent consultations on this and related matters. Please do not hesitate to get in touch with either of the contacts below: James Arrowsmith Browne Jacobson LLP Victoria Square House Victoria Square Birmingham B2 4BU t: e: jarrowsmith@brownejacobson.com Nichola Evans Browne Jacobson LLP Ground Floor 3 Piccadilly Place Manchester M1 3BN t: e: nevans@brownejacobson.com

4 Introduction You have not set out within the consultation the criteria which you are seeking to satisfy in developing regulation in this area. In our view the objectives of this consultation should be to ensure: 1. That compliance is maximised, from the date on which the ban comes into effect; 2. That solicitors are assisted in developing business models which will be appropriate following introduction of the ban; 3. That a strong, independent and diverse legal services market is maintained; 4. That regulation under LASPO is enforceable and not amenable to judicial review. Responses to the discussion document Lack of Clarity under LASPO While we recognise that your regulatory framework is outcomes focused, and in any event every possible arrangement to secure work cannot be anticipated before the ban, we agree with other respondents to your earlier consultation that in this instance greater certainty is required than is offered by LASPO, and we consider it to be regulator s responsibility to provide this. We have highlighted in response to your guidance notes a number of permutations on the scenarios you have considered which in many industries would be considered normal, commercially sensible advertising or marketing arrangements, but which may fall foul of your interpretation of a referral fee. Solicitors, particularly those affected by the ban, presently face an exceptional combination of circumstances, which make their market highly competitive. These include: the significant reduction in fixed fees for injury cases the introduction of fixed fees in areas where these were not previously in place new ABS entrants into the market new funding arrangements under other aspects of LASPO the referral fee ban itself the current economic climate banks and lenders reluctant to extend credit high professional indemnity insurance costs We don t believe that firms of solicitors shy away from competition or wish to be granted special protections. However, in order to remain competitive in this environment, solicitors (like any other business) require a reasonable degree of certainly from their regulator. In the absence of certainty, solicitors cannot plan their business, make decisions on investment or seek external investment. We acknowledge that the ban does not create a criminal offence or render a retainer ineffective. However, the do make the contract for referrals void (which could cause considerable damage to a business if payments under the contract are unexpectedly found to be unlawful) and could require a

5 business to cease operation of a business model it previously considered to be permitted, which is likely to have immediate financial implications. We believe that the public interest is served by a strong, diverse legal sector. We consider this will be damaged if poorly implemented reform results in smaller or specialist firms to fail. You have referred to these concerns at paragraphs 20 and 21 of your paper, and acknowledge that they are legitimate at paragraphs 32 to 35. You suggest that small businesses might reconfigure their business model. That will be difficult or impossible without clarity as to what business models are permitted and in any event such reconfiguration requires funding and both solicitors and their banks may be reluctant to make such an investment where there is uncertainty as to whether the model is permitted. We do not agree that the full impact assessment following the ban, proposed at paragraph 36, is an adequate answer. Once diversity in the market has been lost, it will be extremely difficult to reintroduce it. Burden of Proof We do not agree that LASPO puts the burden of proof on individual firms. The relevant parts of s 57 are: 57 Effect of rules against referral fees (1) The relevant regulator must ensure that it has appropriate arrangements for monitoring and enforcing the restrictions imposed on regulated persons by section 56. (2) A regulator may make rules for the purposes of subsection (1). (7) Subsection (8) applies in a case where (a) a referral of prescribed legal business has been made by or to a regulated person, or (b) a regulated person has made an arrangement as mentioned in section 56(2)(a), and it appears to the regulator that a payment made to or by the regulated person may be a payment for the referral or for making the arrangement (a referral fee ). (8) Rules under subsection (2) may provide for the payment to be treated as a referral fee unless the regulated person shows that the payment was made (a) as consideration for the provision of services, or (b) for another reason, and not as a referral fee. This simply empowers you to make rules which shift the burden to solicitors, if you consider that appropriate. If you choose to exercise that power then, in our view, the burden is only partially shifted. If you exercise your power under the section then the combined effect of these provisions is that where you are satisfied that a referral or arrangement under s 56(2)(a) has been made and that a payment was made for the referral and it appears to you that the payment may have been for the referral then (and only then) it is for the solicitor to show the payment was not a referral fee.

6 In our view, if you are to exercise this power then this must be done via clear and unambiguous words, which should set out the circumstances in which you will treat a payment as being prima facie a referral fee, subject to a solicitor proving otherwise. Alternative Business Structures We accept that an ABS will be regulated, will not be able to pay or receive referral fees between themselves and third parties, and will have to comply with LASPO in relation to payments between businesses within a group. However, this disregards the fact that the owners of a group will be interested in achieving profit across the group and it may not matter from which particular company. So, for example, a referral fee arrangement within a group might be: Owners/ parent Co. profit Referral fee solicitor referral CMC That arrangement clearly involves a referral fee and would be prohibited. However, the same group could operate as follows: Owners/ parent Co. profit solicitor referral CMC In other words, the CMC could generate little or no profit, but be run by the parent company as a means of feeding the solicitor. Sums that would previously have been paid for referrals would be kept by the solicitor s practice, increasing their profit and therefore providing the same benefit to the owners as if a referral fee had been paid to the CMC. We would be interested in your view as to whether this is lawful. It does not appear to us to breach the ban, and investors currently appear to be preparing to operate under this type of model.

7 We suggest that solicitors who are not in an ABS or are not operating in a group should have an equivalent flexibility to enter into arrangements for marketing and work generation, without paying referral fees. Joint Marketing/advertising We agree that it will be appropriate to look beyond the name given to arrangements, in order to establish whether a referral fee is being paid. However, this exercise must be undertaken with due consideration for modern approaches to marketing, and commercial justifications for arrangements. For example, it is commercially sensible and common practice, for marketing and business generation services to be paid by results. It will damage legitimate competition if solicitors cannot enter into contracts with marketing agencies which reflect this, which might include: a regular marketing fee, with a penalty if business generation targets are not met a regular fee with a bonus, or staged bonuses, if business generation targets are exceeded Marketing via an external agency where payment are calculated to cover the marketing costs alone, but where payment by results is achieved by calculating payment based on the number of claims received. Payments to websites for click through traffic where payment is per click through joint marketing between firms, using an external agency, who will share referrals equally, and each pay an equal contribution to marketing costs joint marketing between firms of differing sizes, using an external agency where referrals will be shared in different proportions, with firms contributing in line with the percentage of instructions they receive. Joint marketing between firms where firms share the burden of printing materials, receiving queries etc (using their own resources) and then exchange details based on a rota or by region. (in this regard, it is necessary to bear in mind that the definition of a payment includes any consideration) In our view, none of these arrangements would seem unusual to a marketing agency, and many are used in heavily regulated sectors. Equality Impact Assessment We do not consider it appropriate to defer a proper assessment until after a ban has been implemented. By that stage, adverse equality impacts will already have occurred. Proposed Changes to the SRA Handbook We agree reference to s56 of LASPO is the appropriate starting point, and that there is no need to repeat that section in the handbook. However, if you intend to rely on s 57 (8) then you are required to make rules. These must, in our view, be set out explicitly. Given such rules have the effect of shifting the burden of proof to a solicitor, rules must be clear and unambiguous, and must set out the circumstances in which the

8 burden might be reversed. We do not consider that simply summarising the section within your definition of a referral fee is adequate. Regarding the proposed outcomes, these do not deal with s 56(2) of LASPO, relating to arrangements for referral fees. We question how solicitors are to comply with indicative behaviours (i) and (ii) without clarity as to the arrangements which you, as regulator consider to be referral fees. While we recognise that (iv) is only an indicative behaviour, and we agree that consideration of the market rate may be relevant, the poor bargaining by a solicitor in relation to their marketing arrangements should not amount to a breach, in our view. Draft Guidance We have raised the need for clarity above. In our view, your guidance is the appropriate place to provide this. The examples given in the guidance are generally helpful, however we invite you to express your own views more clearly (eg at paragraph 25 replace It is therefore likely that with In out view. We have suggested other scenarios that can helpfully be considered. In our view these are all scenarios that you are likely to encounter, and the intended regulatory outcomes are much more likely to be achieved if you provide guidance as to whether they are compatible with the ban now, rather than awaiting a potential breach and making your decision then. We have set out our general views above, we therefore limit our comments below to proposed amendments to specific paragraphs in this section: Paragraph 10 we suggest you should clarify this by also setting out your view on the position where the uninsured loss claim is referred alone (eg because another firm is dealing with the injury claim). It appears to us that, as it arises from the same facts as an injury claim it strictly falls within the ban, but the receiving solicitor may not be aware of the injury claim at the outset. Paragraph 14 we suggest you clarify whether communication of the name alone, or address alone would amount to a referral. In many cases this would be sufficient to initiate contact with a potential client. Paragraph 16 and 17 what would be the position if: the contact details were sent to the firm (but the website simply took an annual fee)? the firm paid according to the number of potential claimants who received the firm s details? the contact details were sent to the firm, and the firm paid a fee for each set of details provided, but this was minimal and reflected the genuine cost of the website s services? the potential claimant was able to click through from the website to the firm s website, and enter details there. The firm paid the website a fee for each click through?

9 Paragraph 21 and 22 what would be the position if: The firms are of different sizes and each take a different proportion of claims, and pay towards the marketing costs in line with that proportion? The firms want flexibility to take or refuse claims according to capacity, but want to share costs fairly and therefore each pays a percentage of the genuine marketing/advertising costs which is in proportion to the number of claims they received in the preceding month? To save costs, the firms do not use an external call centre but have calls routed through to their offices via a switchboard. Once details are taken, claims are passed to the firm most local to the claimant. (NB each firm is providing consideration by taking calls)? The firms use one of the arrangements above, but employ an external firm to provide the marketing and call centre services, paying a basic marketing cost, but with a penalty if the marketing firm does not secure a target number of clients? As above, but rather than a penalty there is a basic cost plus a bonus for each 100 claims over an agreed target? Paragraph We invite you to clarify why you consider that a payment is unlikely to be a genuine advertising payment when it is a payment per claimant. As illustrated above, there are a variety of scenarios in which it would appear to make good commercial sense to engage a marketing company on a payment-by results basis. Draft Supervision and Enforcement Strategy Our comments above are also relevant to the strategy. In particular, we consider the most effective means of ensuring compliance is to provide clear guidance as to permitted arrangements. We recognise that you cannot give an authoritative interpretation of s 56 of LASPO, however LASPO makes it clear that enforcement is the responsibility of regulators and so you can identify the types of arrangement you will investigate and in relation to which you might impose sanctions. Of course, the regime may develop over time, which may lead you to adjust your views. In that case, amendments should be made to the guidance in advance of a revised approach to enforcement being implemented, and time allowed for firms to comply. You have indicated at your public meetings that you will not pre-approve particular arrangements. We consider this seriously hampers solicitors ability to comply with the objectives and indicative behaviours you propose. They cannot ensure compliance with regulation unless you, as the regulator, are prepared to supply guidance as to what is and what is not acceptable.