The Ministry of Justice has recently introduced a ban on referral fees for solicitors in personal injury matters.
A referral fee is charged by one company for providing a client to another company; a common example of this would be a solicitor paying an estate agent a fee for recommending their conveyancing services to prospective house-buyers. The estate agent gets a fee and the solicitor has a client and therefore will eventually still make a profit.
In personal injury claims, however, the situation appears to have got slightly out of hand.
A solicitor may charge a referral fee, but so also may the claims handler (companies that act as middlemen between the injured person and the solicitor) and the insurance company. As a result of this the actual cost of pursuing a personal injury claim increases dramatically.
This is particularly the case in personal injury claims as most solicitors offer a no-win-no-fee service. These services are provided because solicitor hopes to 'win' the case and as a result the loser will have to pay the winner's costs. Therefore, the client will receive compensation if successful and not have to pay costs if they lose, whilst the solicitor will usually receive a larger fee than they would normally do if the claim is successful.
The problem with this is, of course, that the defendant will have to pay the claimant's costs (the solicitor's costs) which are likely to be much higher than they would have been had it not been for the referral fees.
With defendants usually insured, insurance companies have to put up the price of their policies as a result of having to pay out higher claims. When this happens everybody loses out as we all have to pay higher premiums for our insurance policies.
Some solicitors have been criticised for encouraging people to bring claims for accidents and going too far in pushing people to make claims when there is no real injury or stress caused. One particular personal injury claim that has been gaining popularity recently is for whiplash, which is very difficult to prove medically.
Those who argue in favour of referral fees claim that they allow far more people to have the opportunity to make a genuine claim. No-win-no-fee offers are very attractive to individuals who are worried about the prospect of escalating solicitor's fees and it could be argued that more people have access to justice as they are not put off by costs. But claimants must remember that they could still face paying the other side's costs should they lose their claim.
The referral-fee ban will be a blow to some solicitors and could potentially lead to less no-win-no-fee deals being offered; however, the Ministry of Justice assert that referral fees "have led to high costs, encouraged a compensation culture and led to the growth of an industry which pursues claimants for profit".
Read more on the story (BBC)
Read an overview of accident and injury law (FindLaw)
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