A lot of the blame for the UK ‘compensation culture’ has been placed on referral fees. Referral fees are now due to be banned from April 2013. So will this ban really reduce the amount of personal injury claims which are made? It is thought that the referral fees are part of the reason the cost of personal injury claims has doubled from £7 billion to £14 billion in the past ten years. Referral fees are fees paid to insurance companies, trade unions and claims management companies by solicitors for them to refer their clients directly to them in the case that they may wish to claim. The government believes that the referrals which have been taking place have been pushing individuals, who would not have claimed, into claiming. The combined cost of all these minor personal injury claims adds a huge amount to the total cost of personal injury claims in total. Therefore, both the payment of and the receipt of referral fees is set to be banned.

In theory, yes it is an incredibly good idea. Reduce the number of unnecessary claims to reduce the overall cost to the insurance business to reduce the cost of insurance to us as the consumer. Also the predicted reduction in claims would massively benefit the government as claims cost government run institutions – such as hospitals- an extortionate amount per year, leaving the money free to be invested back in to the institutions to make them the best they can be. This is all well and good, but how will it work in practice? Large concerns are being voiced about how the ban will be policed.
The Solicitor’s Regulation Authority (SRA) has been contemplating how to enforce the ban, focusing their efforts on the specific meaning of ‘referral fees’ in an attempt to stop the use of any extremely similar techniques going via the same name. This is sensible but the concerning side note to the SRA’s current work towards drafting a regulatory procedure is that they have explicitly said they will not be able to regulate firms using Alternative Business Structures (ABS) to get round the ban if they still adhere to the regulations they set out. This smells a little like a cop-out on the SRA’s part. Not allowing the use of ABS to avoid the ban would police the ban properly. Allowing the use of ABS is simply allowing an obvious loop hole in the ban.

Essentially, I believe if the ban of referral fees is properly policed, stopping claims management companies repeatedly texting and calling potential claimants we will see a reduction in unnecessary claims and also a reduction in our irritation at this intrusive style of marketing. Whether the SRA pulls through and polices the ban in the most effective way – this remains to be seen.

Author: Nicholas Jervis