The truth about referral fees

This page is only of historical interest now, as referral fees cannot now be paid by solicitors for personal injury cases since 1 April 2013.

There are so many headlines and so few facts about referral fees in personal injury compensation cases.

Payment of fees and commissions for the introduction of business have always been a fact of business life in general. A referral fee is a payment for the introduction of a client.

Referral fees really took off in the personal injury field after legal aid was replaced by conditional fee agreements, or no win no fee as they are called. To “compensate” for removing legal aid solicitors were allowed to charge a success fee to reflect the risk they ran of not being paid if the case lost.

• Success fees meant higher fees for solicitors in winning cases.
• Those with their marketing eyes open spotted an opportunity. They put themselves between the client and their solicitor and charged a fee for introducing the two.
• Solicitors had been lazy in their own marketing so the television advertising campaigns began – you remember the reassuring presenter asking if you have had an accident telling you to call.
• It was convenient for you as you just had to call a 0800 number and off you went.

So the additional fees from the success fees became the solicitors marketing spend, and the middle men, or Claims Management Companies as they became known, owned the client. Competition increased amongst the middle men, and this meant anyone involved in a road accident was contacted by many outfits fighting to refer the case to a solicitor.

The insurance companies saw this business develop and decided they wanted a piece of the action. After all they get the first call after an accident so were already in the best position to “own” the client and refer details for a fee.

• Insurance companies did not need to run expensive advertising campaigns, they just had to learn how to identify injury cases and make deals with solicitors.
• Insurance companies have made things worse by outsourcing their call handling service to claims management companies.
• Insurance companies reduced their staff costs, and probably have their calls handled for free.
• The problem created is that every accident is examined to see if there is a compensation claim.
• The outfit taking the call might decide the caller is to blame, and it is no surprise when the innocent party will soon receive a call offering help in making a claim.

By cutting staff costs through outsourcing the insurance companies have made sure the maximum numbers of compensation cases are brought.

Accidents numbers are falling, but as there are so many outfits encouraging compensation claims more compensation cases per accident are brought.

So the cycle has been created, and people are more aware of the right to seek compensation.

Compensation is actually necessary and a good thing. You can see it as social engineering. We buy insurance to cover our liability to pay compensation if we cause injury or financial loss due to our fault. It saves the State money, and allows people to put themselves back on their feet financially. Many opponents of compensation have salaries and company cars. They might not worry about a neck injury as they recover with the help of private medical support. But what if the injured person is self employed, or on hourly pay, are they supposed to take the hit?

When I started working in this field 27 years ago claimant personal injury lawyers were seen as fighting for the underdog. My satisfaction lay in putting clients back where they were before the accident so far as money can do that. I am still doing that today but within a business which has been made to feel grubby by misinformed media reports and insurance company lobbying.

Referral fees are paid by solicitors from the fees they receive in successful cases. The effect is to reduce solicitors’ income. Those referral fees should not be paid by clients, so beware of any deduction from your compensation. I am not convinced referral fees have added to the cost of claims for insurance companies, and you will see referral fees have added to their income.

I attract clients through other clients, through this website, and through Your Key. I am glad to say I do not depend on middlemen so I have no axe to grind.

Please have your own opinion, and please share it, but please form that opinion after hearing the whole story.

Claims management companies are regulated and must tell you of any referral fee they receive. Insurance companies managed to sit outside this regulation despite being the biggest recipient of referral fees. Solicitors have built businesses on the basis of the cases they receive from these middlemen. Will banning referral fees actually stop payments for introduction of business, or will other ways be found to secure clients?

I suggest we put to one side the outraged headline writers and decide what the problem is.

I am happy to discuss your thoughts and answer your questions.

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