'I was a litigator before becoming an MP. I started in 1978,’ says Andrew Dismore, the former Labour MP who heads the Access to Justice Action Group. ‘Back then, a lot of people didn’t have the opportunity to bring their cases, pure and simple.’ There was the phenomenon known as the MINELAs or ‘middle income not eligible for legal aid’. He recalls: ‘All those people missed out on access to justice unless they had insurance, a trade union or somebody else willing to act for them.’

The Access to Justice Action Group is aiming its fire not at plans to scrap £350m from the £2.1bn legal aid budget, but at the implementation of the Jackson reforms and, in particular, at the scrapping of recoverability of success fee and after-the-event (ATE) insurance premiums. The reforms are billed as returning us to the world before recoverability, so what was life like back then?

Conflict of interest

When Dismore started his career, lawyers, collectively, were extremely wary of ‘no win, no fee’, despite debate throughout the 1970s and 1980s about the viability of a style of contingency fees that had been in operation in the US since 1850.

A 1979 Royal Commission on Legal Services (the Benson Commission) concluded that a change in the law to give lawyers a direct financial interest in the outcome of a case was not in the public interest. Five years later, the Civil Justice Review recommended that the issue be looked at again. In 1989, the government published a green paper examining whether the restrictions on the use of contingency fees should be lifted. The overwhelming response was negative.

A white paper published later that year rejected contingency fees, but floated the idea of ‘conditional fees’. Contingency fees, it was argued, would ‘create an unacceptable degree of conflict of interest between the lawyer and his client, which could result in his being unable to give the client or the court advice of the required degree of impartiality’. There was little objection to funding based on the Scottish method of ‘speculative’ actions, though, whereby, if the case was lost, the lawyers were paid nothing and, if they won, they would receive the usual fee.

Conditional fees were introduced in 1995 under the Courts and Legal Services Act 1990. First-generation CFAs allowed a lawyer to take on a case on the understanding that, if the case was lost, they would not charge and, if the case was won, they would be entitled to charge a success fee, calculated as a percentage of normal costs, as recompense for risk. So the original CFA allowed lawyers and clients to share the risks of litigation.

Dismore’s government introduced the present system of CFAs under the Access to Justice Act 1999. The former MP sat on the bill committee as it went through parliament. Does the existing system deliver ‘access to justice’? Yes, he replies; the key is ‘no win, no fee’ and recoverability. The coalition, of course, is proposing that success fees should be capped at 25% of part of the damages, that they should come out of any compensation and the claimant should pay the insurance premium. The cumulative impact of the Jackson package is, his group argues, ‘like Robin Hood in reverse’.

Logical scheme

Patrick Allen is senior partner of the claimant firm Hodge Jones & Allen. As he recounts, New Labour wanted to abolish legal aid in personal injury and ‘knew it would be difficult because there were a lot of cases involved and people in receipt of legal aid were, by definition, impecunious’. He continues: ‘The only way the government could do this was to make sure arrangements were put in place to look after the cost risk and the cost of losing cases. Solicitors had to be paid for losing cases with success fees, which couldn’t come out of people’s damages because that would cause a political storm.’ So they ‘decided to ringfence damages and introduce recoverability. It was a perfectly logical scheme given they wanted to scrap personal injury legal aid.’

What did Dismore make of his government’s shake-up of conditional fees under the 1999 legislation? ‘At the time, I was very sceptical about it,’ he confesses. ‘Not so much about recoverability, but about the removal of legal aid. I thought that would result in people being denied access to justice. I was wrong. It has had the opposite effect.’

Allen argues that, if you take away recoverability - ‘assuming we still get some success fee from damages because of the Jackson [25%] cap’ - it will not be ‘the success fee we need and we will not be able to break even’. Inevitably, that means the make-up of the fabled ‘basket of cases’ will change, he says. ‘It must mean, in my view, that you tend to reject cases that are 51% to 80% likely to succeed because you will not be getting the success fees to pay for the losses.’ Allen predicts ‘a race to the bottom’ as lawyers reject riskier cases. ‘The current business model is in tatters,’ he says.

The Association of British Insurers (ABI) dismisses as ‘fundamentally flawed’ the claimant lawyers’ line that they will not take on cases with low chances of success if the recovery of success fees is abolished. ‘Claimant lawyers are not obliged to take on cases currently; they already choose the cases they take under our existing civil justice system,’ it says.

As for ending recoverability of ATE insurance premiums, the ABI quotes Jackson’s finding that the average premium in a case against the NHS is more than £10,000, which, it says, is ‘clearly disproportionate and unreasonable’. Removing recoverability will ‘engage a claimant in the costs of his claim and ensure they remain reasonable’.

‘We continue to support the full implementation of the Jackson recommendations,’ says Malcolm Tarling, a spokesman for the ABI. ‘One of our main concerns is the great expense of legal costs and, at the moment, there is every encouragement for people to make spurious and exaggerated claims. We are not against genuine claims, but we think there is "too much fat in the system".’ This is, as Tarling observes, an expression used by both the justice secretary Kenneth Clarke and minister Jonathan Djanogly. ‘We don’t mean the "fat" being paid out to genuine claimants but "fat" around the costs of bringing claims and legal costs, which adds 10% to the average motor premium.’ In many cases the claimant ‘doesn’t have any direct financial interest in whether they win or lose’, Tarling adds. ‘There is nothing at stake.’

Leaving the market

It is a message that has not gone down well with ATE insurers who are members of the ABI. Tarling says the ABI recognises that some insurers’ entire business models are based on ATE. Major legal expenses insurers including DAS and Elite Insurance have split from the association on the basis that it has not represented their interests - quite the contrary, in fact. Elite’s chief executive Jason Smart says: ‘If concessions aren’t forthcoming and the bill goes through as planned, we will have to make a choice and, at the moment, that would be to withdraw from the market.’ Elite wrote about 75,000 ATE policies last financial year and ‘around 70,000’ were under solicitors’ delegated authority schemes, comprising mainly volume personal injury cases. The remainder was commercial litigation.

Michael Lent, underwriting director of Temple Legal Protection (which writes about 25,000 cases a year), believes a ‘fundamental schism’ has grown between ATE insurers and the ABI. ‘There is a fair bit of disgust at the hypocrisy of mainstream members of the ABI, who want to get rid of CFAs and ATE while trousering referral fees as fast as they can.’ Will Temple leave the market? ‘We will have to find an alternative model, but it is difficult to see one that works.��

Ross Clarke is head of underwriting at First Assist, which was set up in 1999. What does scrapping recoverability mean for the company’s business model? ‘We certainly are not going to be pulling out of ATE,’ he replies, pointing out that only about 10% of their business is low-value road traffic accidents. ‘We recognise, in some areas, the market is going to be restricted and, for low-level RTAs, severely restricted. If there is one-way cost shifting, you don’t need ATE, do you?’

Clarke says the bill is ‘only about 10% of the story’ and the detail will come in the draft Civil Procedure Rules. ‘What is one-way cost shifting going to mean? What is the new test of proportionality?’ He adds: ‘The real concern is if the risk is high - will a lawyer be prepared to pursue that case on a success fee capped at 25% of the damages? It seems inevitable that we are pushing towards the cases that are sure-fire winners, where damages are higher. Everybody will want those. The question is, what happens to the rest?’

Rocco Pirozzolo, solicitor and senior underwriter at QBE, predicts that scrapping recoverability will introduce the type of threshold that third-party litigation funders operate, filtering those cases that ‘just aren’t worth financially pursuing’ and differ according to a variety of factors, such as type of dispute and the amount of money involved.

‘If a client is acting under a CFA or a damages-based agreement, the client will have to prepare themselves not to expect 25% of the recovery and then consider the cost of ATE insurance. They might well then say, is it really worth it? The answer to that question is something that is going to be personal to each client.’

Aligned interests

Not everyone is as black and white about recoverability as the claimant lobby would suggest. Kerry Underwood, senior partner at Underwoods Solicitors and author of the seminal No win, No fee, No Worries, takes a more nuanced view, differentiating between the treatment of success fees and ATE premium. The former is a deal struck between solicitor and client, and, as such, he argues it should not be recoverable. However, ATE is different. The other party has a real interest in the availability of insurance because, in Underwood’s words, ‘essentially they are the beneficiary’ by ensuring the losing claimant has got the money to pay their costs.

If Jackson feels he has to go a long way to find a claimant lawyer to fully back his plans, he might be right. Andrew Grech is managing director of Australian personal injury firm Slater & Gordon (S&G), well known for being the first legal practice in the world to list on a stock exchange. Grech acknowledges a ‘natural fascination’ with ‘our status as a listed company, but that somewhat misses the point’. S&G has devised the best business structure to suit the firm’s strategy and the legal services market in which it is based, he says.

What is of greater interest is the ‘very strong differences between Australia and the UK’, he adds. The first is the way in which legal services are paid for in the UK, particularly the ‘very interesting phenomenon in the form of legal expenses insurance’ and, in particular, ATE. ‘That simply does not exist in Australia.’

Grech, whose firm has trademarked ‘no win, no fee’, is not a fan. The lawyer regards the 1999 shake-up of CFAs as a perverse move. He calls the Australian system the same as England and Wales ‘except - if you do not mind me putting it this way – for pretending that the client is really at risk in the way that you do in the UK. We don’t distort the market by selling clients insurance policies.

‘In my opinion, that development has been very unfortunate and simply allows insurers to again "clip the ticket" and increase the expense of legal services to consumers, who end up paying even more through premiums or the cost of solicitors.’

It is not a view that will endear him to the UK claimant lawyer community - a community he could soon be joining as Slater & Gordon has made exploring ‘potential opportunity’ in the UK one of its business priorities for the coming year. The firm has cited the global financial crisis, the introduction of alternative business structures and the impact of personal injury reform on the profitability of small firms as factors driving change in the UK market.

Grech says: ‘I read Jackson and I agree with his recommendations in their entirety. I think Jackson is right and, I’m afraid to say, my brethren wrong. "No win, no fee" functions perfectly well in Australia without the distortion of your ATE insurance market.’

The Australian model ensures that ‘clients and lawyers have aligned interests’, Grech says. ‘To put it at its simplest: it reduces transaction costs.’ There is ‘a very interesting esoteric debate’ about whether defendant (through increased insurance premiums) or client covers the cost, the Australian lawyer reflects. ‘In my opinion - and I mean this respectfully - it is a silly debate. It all comes out of the same pockets and that is the claimant’s pockets.’

Jon Robins is a freelance journalist

Litigation Funding

This article was first published in the October issue of Gazette sister magazine Litigation Funding, the essential guide to finance and costs. For subscription details, see the website.