Jackson calls for success fee reform and end to PI referral fees

The new proposed RTA costs regime allows for the recovery of a success fee and now we are being told no sucess fee is payable. Its a complete mess.

So we are coming full circle. Referral fees to be abolished? Referral fees have been paid in RTA PI work for many, many years - well before they were authorised. The fact that the solicitors code of conduct did not permit them back in the 90's did not stop them being paid - in huge numbers. All that will happen is that they will be pushed back to being the "brown paper envelope" type payments and that cannot be in anyone's interests. As a previous poster has said, the fact remains that most solicitors are very poor at marketing their wares or their businesses and this is borne out by the fact that CMC's have not only survived but prospered. If there were no need for them, they would not exist and whilst solicitors can huff and puff about them, the fact is that without them whole solicitor's departments, indeed firms, would not exist and if the Jackson reform is implemented some will simply cease to exist.

However the chances are that this proposal will be debated for many many months along with some of the other controversial aspects of his report. There is an election this year and that will further put a spanner in Jackson's works and I very much doubt that this proposal and many of the others will ever actually come to fruition.

I would generally agree that a ban on referral fees, which would push a lot of claims management companies out of business, is welcome. In my view, claims management companies do much more harm to the reputation of the profession than they do good. As Tom Shaw says in his post though, they do fill a void and complimentary steps MUST be taken to ensure that the access to justice (or "marketing" to put it another way) that they provide continues, and assistance given to the reliant smaller claimant firms in attracting caseloads.

I think that the removing of recoverability for success fees and ATE premiums has good intentions, they do disproportionately balloon costs. However, an arbitrary 10% uplift in damages to claimants seems a biazarre and artificial way of balancing this out so that it does not bite too hard into claimants' damages. If success fees are being paid by the claimants themselves, then an uplift in damages will mean more going to their solicitors anyway - even more so if continigency fee agreements become lawful and widely used. What is the point in seeking to remove the direct link between defendants/their insurers and paying disporoportionate costs to the claimant's solicitors, if most of it ends up going to them anyway. And if it doesn't, why give claimants more than what their injuries are truly worth? A re-think on this one is needed I think.

An interesting report but somewhat academic in nature given the imminent arrival of Alternate Business Structures.

As a direct result of solicitors paying CMC's huge amounts of cash for what is ostensibly a simple sales function they have contrived to make said CMC's powerful and wealthy.

In addition, the CMC's have far earlier (and greater) interaction with the clients than the solicitor.

Consequently, CMC's are in a much better position to take advantage of such reforms than the majority of High Street Lawyers.

They are not going to quietly disappear!!!

From my understanding the suggested reforms in relation to success fees will see Solicitors be much more careful when taking on cases, for one or two firms this may be a good thing. However, for the vast majority of Firms this will become a serious consideration, even when dealing with a Client that has a decent level of success in a relatively low quantum case.

One of the classic Public Liability cases used to agree Success Fees is KU v Liverpool City Council, a high portion of Success Fees in Public Liability cases are agreed at 50% on the basis of this Case Law. The same can be said for Abrew v Tesco, this case too is often used to agree Success Fees at 50%

Based on the ready reckoner this would suggest that 2 in 3 PL cases of this type are won, suggesting a success rate of 66%. Accordingly, on average the 50% success fee in each of the two successful cases makes up the loss made on the 3rd case. Whilst i appreciate this may not be entirely accurate, the point is not the case law or percentages, rather it is the premise that is important.

The proposals allow a maximum success fee of 25% (albeit taken from of the Claimant's damages). Which leads me to ask what is the point of a Solicitor taking on a PL case similar to the two cases mentioned above?

According to the ready reckoner they can expect to lose 1 case in 3 and yet they can only recover a maximum of 25% of the claimant's damages. This means that they will actually have to win more like 4 cases to make up the lost income from every 5th case. Why should a Solicitor then take on a case where the ultimate damages will probably be relatively low (thus allowing only a small success fee) and where the chances of success are less than 80%? Essentially the reward is reduced while the risk remains the same.

Whilst i appreciate it's difficult to consider the position clearly as we are now looking at a new addition to the costs process (i.e. the recovery of the success fee from the Claimant's damages), i feel my ultimate point is a fair one. Solicitors will see a reduction in the income from higher risk work unless they solely elect to take on cases where the Damages are expected to be significant, thus potentially taking away either access to justice for the Claimants in more low value claims or reducing the Solicitors income.

Without wishing to sound sensationalist, this in turn could result in a slight reduction in the number of vacancies in the industry, with Firms potentially taking on less work or less profitable work or both, their ability to employ Fee Earners may be reduced. Couple this with the fact that Firms may seek to become more competitive by reducing their success fees. This could reduce profits further. The owners of these Firms may then find themselves better off employing a Claim Handler rather than a newly qualified Solicitor as they will be cheaper to employ and have lower pay expectations further down the line. In my own experience I have seen a shift towards Firms using unqualified Claims handlers since the inclusion of Fixed Fee RTA's, If some of these recomendations are implemented I expect this will only continue to become more prevalent.

There are interesting times ahead.

To me Jackson's most revealing comment is that he thinks there is too much money in the system. In a nutshell it is going to be cut back.

Banning referral fees would in theory mean that solicitors will have to spend more on marketing. For many firms with an insufficient local market and an average reputation, this is bad news because the marketing spend to get the same volume through the door will be uneconomic. Its not just a question of CMC's teaming up with solicitors, the whole economics of PI practice is going to change.

The costs incurred in cases will have to be rigourously "proportionate." We don't know yet what will be considered proportionate. But Lownds v Home Office is out and what will count is the damages to costs ratio. It seems unlikely that a case going to trial will be considered proportionate if the costs exceed 100% all in and in cases that settle - 25%, 40% of the damages? On a £7000 settlement, I'd guess the all in VAT & disbursement cost is unlikely to be more that £3500. Claimant solicitors will try to argue under the get out clause that it was the defendant's behaviour in disputing points they lost which caused the high costs and they should recover , but that is the old rationale which is definitely out.

As Jackson wishes, solicitors will compete in a race to the bottom to charge low or no success fees to their paying clients. Welcome to the market boys and girls. In the round, its unlikely that appeals to quality will count for much because the great majority of solicitors do PI law reasonably effectivel.

All this means much lower hourly rates, senior solicitors will be uneconomic save those who manage and train the unqualified staff, Barrister fees will be cut, solicitors will start arguing fees with experts who have been milking the system with totally unsustainable fees for years. Some firms, those that can invest in the IT and other systems to do this work at very low cost may do well, but at the same time those who have expanded their support functions may well find the support overheads look very difficult. Many firms will give up PI.

On being elected, Cameron will survey the system, listen closely to the Daily Mail/ insurer agenda and put the small claims limit up to £5000. He may be more radical than Jackson such that claimant lawyers come to see Jackson's reforms as the best option.

I am afraid that much of this is the fault of the legal profession. Many claimant firms of solicitors have neglected good business practice, failing to attack costs using better IT and negotiating cost cuts with suppliers like experts and Barristers and in some cases, increasing costs as a deliberate strategy. The only market pressure on solicitors to control costs in PI has been the need to pay referral fees and still make a profit and so called "costs muppets". Many solicitors have failed to develop proper business strategies and market their practices effectively leaving the field open to non solicitor professionals to leach on the system.

The system has created a mess and now it is to be unwound. It is not going to be pleasant. Its inevitable that access to justice will suffer as the institutions by which justice is delivered readjust. But access to justice sits within a the wider policy framework of an effectively functioning society. The long overdue shake out in PI will now occur and the public will support it. I mix with many non lawyers and almost without exception they despise the cultural shift represented by what they see as the blame/victim culture, much of which is attributable to CMC advertising. They believe that much of what PI lawyers do is trivial.

Seeking to protect the system itself, the judiciary via Jackson has called time on this. At least he leaves a system with lawyers in it. I suspect that without Jackson, Cameron would bury it altogether. Jackson provides a sensible alternative. The party mood has been declining for some time but now it is definitely over.

It would be interesting to see the prospective solicitors deserting the system because of such a reform. Clearly in this recession, capping the costs a solicitor may charge reduces any realistic chance to get into a profession that may sustain the solicitor as a person. Moreover, those already in the profession would readily notice that the costs needed to invest to investigate such cases as PI sometimes cannot even be made up for by the uplift. Some already struggling at the moment would without a doubt be tempted to leave the whole area of work.
Perhaps it is right that the Jackson reform should be implemented, but not right now within the recession. The biggest problem, therefore, should be the timing of the reform. Otherwise, it would not be too big of a problem, as all the changes should not happen all at once