The Legal Ombudsman has penalised firms almost £1m in the space of a year as concerns mount about ‘no win, no fee’ offers.

The legal complaints services today reports an increasing number of enquiries relating to conditional fee agreements (CFAs).

The ombudsman is now raising the question as to whether the ‘no win, no fee’ descriptor may be used at all.

Such funding arrangements have become more prominent since the Jackson reforms came into force. From last April lawyers’ success fees can no longer be recovered from the defendant and must instead be taken from damages awards.

In today’s report, the ombudsman says examples of ‘very poor service’ have been reported in the last year. These include lawyers failing to honour agreements with clients or exploiting loopholes in the contract.

Financial remedies awarded on CFA cases from November 2012 to November 2013 came to £944,000, which includes compensation, reduced fees and the costs of putting things right with consumers.

Chief Ombudsman Adam Sampson said: ‘The ‘no win, no fee’ market has become increasingly aggressive, with many law firms competing for cases and sometimes prioritising sourcing a large number of customers over a careful selection process. 

‘A business model which consistently overvalues the chances of success can drive lawyers into unethical practice in order to avoid financial meltdown. This report raises genuine questions as to whether the "no win, no fee" label should be used at all.’

The LeO handled around 600 complaints about CFAs last year – around 8% of the total number of complaints – and said the impact when they go wrong can be heavy for consumers.

The ombudsman report highlights a ‘structural weakness’ in the nature of agreements which allows some lawyers to pass the risk of unrecovered costs onto the consumer.

Agreements were also found to be complex and unclear in terms of the financial risks to consumers.

In one case highlighted by the ombudsman, a client was told to pay £24,000 to a firm that had pulled out of his case after it found he had represented himself in court and won. The firm had dropped his case halfway through, stating it had no chance of winning.

Once the client complained to LeO, the service ordered that he did not have to pay a penny of his winnings and the firm was forced to pay compensation for the upset its actions caused.

The Advertising Standards Authority has warned against the risks of referring to CFAs as ‘no win, no fee’ as clients can be liable for undisclosed costs such as insurance if they lose their case.

Lynsey Taff, director of communications for the ASA, added: ‘We’ve banned ads that have failed to give that kind of information upfront and we advise any advertiser making such a claim to ensure that the commitment is genuinely without cost.’

In response to the LeO report, Law Society president Nicholas Fluck pointed out that so-called no win, no fee arrangements were brought in by the government to fill gaps left by the removal of some legal aid provision.

‘No win, no fee solicitors are bringing justice to the masses for people denied legal aid,’ he said. ‘Solicitors working on conditional fee agreements take on significant risk with these often complex cases.

‘The Law Society is pleased that the ombudsman agrees with us that solicitors need to be very clear with clients on their agreement terms and commends our model agreement.’