Regulators Target CMCs in Possible Breach of Referral Fee Ban
Serious Law LLP
Hundreds of claims management companies have been ordered by regulators to disclose detailed information of their financial dealings with PI law firms.
The Law Society Gazette reports that many PI firms are now “in a state of panic” as the government investigates select CMCs. Their fear is that the regulators’ findings have the potential to expose a flagrant disregard to the referral fee ban, and it could leave many facing heavy fines or even the prospect of being struck off.
For the CMCs targeted, the Ministry of Justice and SRA have requested all records of referral fee payments received before and after the ban came into effect on 1st April 2013. The investigation is taking an almost forensic-like approach to data and evidence about the ongoing relationships between certain CMCs and PI firms.
Some experts have commented that a number of PI firms have attempted to circumnavigate the referral fee ban by continuing to operate their business under the CMC model, but have simply amended documentation by replacing the term “referral fee” with an alternative and generic term such as “marketing fee”.
The fact that some PI firms and CMCs have continued in this manner will come as a surprise to few in the industry, but their aura of invincibility appears to be waning, finally being replaced by a growing fear of reprisal.
Although figures suggest that the number of operating PI-specific claims management companies in the UK has fallen by almost a third to around 1700, it is clear that the referral fee ban in itself has not been a complete deterrent. However, the steps taken by the MoJ and SRA show that such defiance will not be tolerated.
There has been much debate regarding the referral fee ban; whether it is a viable amendment to the PI legal process, and in particular, how it will be enforced. In some quarters, there has been a feeling that the SRA would not have the resources to challenge the sheer volume of companies that may be in breach of the ban.
To aid this, the Ministry of Justice will undertake restructuring in order to manage their levels of enquiry. Notably, by the end of the year the MoJ plans to shift responsibility for the voluminous CMC complaints away from its own Claims Management Regulation Unit (CMRU) and will hand it over to the Legal Ombudsman (LeO).
This will free up the CMRU to focus on CMC quality standards and of course, target the rule-breakers. However, the government has indicated that new legislation is needed to ensure that CMCs (rather than the wider legal profession) cover the LeO’s costs.
As is well known, the CMC model for PI litigation is blamed for the ‘compensation culture’ that has gained prominence throughout the UK, with the number of false claims made considered to be responsible for the blanket exponential rise of insurance premiums.
Unfortunately, the rise of ‘compensation culture’ can certainly be blamed for a change in the general public’s perception of PI law firms (and perhaps the legal industry as a whole), with all practitioners lumped in under the same umbrella daubed with the obligatory and derogatory term ‘ambulance chasers’.
A particular problem caused by this could be seen in catastrophic injury cases, such as when somebody was required to make a spinal cord injury claim. Often, CMCs would refer the case to an ill-matched, inadequate or sub-standard PI firm, when a specialist law firm would be much better equipped to attain justice.
On the other hand, some have argued that the enforcement of the referral ban would favour large law firms as they ‘swept up’ all available and remaining cases, or that it could perhaps encourage a profit-driven industry where attainment of justice trails a distant second, though there is little evidence of this so far.
Of course, it is too early to draw full and in-depth conclusions about the effectiveness of the referral fee ban.
But it is hoped that the referral fee ban will increase the profession’s quality of service by removing substandard firms and CMCs from the equation. Ideally, PI firms instructed to act will be suitably matched to their clients’ needs, and not as the result of a prearranged financial relationship between two separate corporate entities.
It is a chance to change the nation’s perceptions about the industry; to prove that PI firms’ primary focus is for a fair legal system, not for legal tender.