If there are two words guaranteed to send any audience to sleep in an instant, they are these: Annual Report. By God, they are dull -­ I should know, I have written enough of the damn things. You know that very few people are going to read them but you have got to produce them (the Legal Services Act makes it a legal obligation for the LeO). And there is always a certain formula you have got to follow: governance statements, financial accounts, performance reports.

So you do what you have to: crunch the numbers, highlight the positives and acknowledge there are still areas for development/improvement, get it laid in parliament - job’s a good ’un. But we do try to put some substance in what we produce. And in any event, an annual report - and its ­associated launch - is actually a good opportunity to take stock of things and give some feedback to the ­profession. In this year’s report, our third, we have tried to do just that.

So what have we said? Some of it has been reported in the legal press, but some has not. The report looks briefly at professional ethics and ­discusses - although largely dismisses - the possibility of them being undermined as non-legal executives become more influential within firms through alternative business structures. But it does see greater risk coming from the increasing use of funding mechanisms, such as conditional and fixed-fee arrangements and legal insurance ­policies, citing the frequency of ­complaints which reveal a degree of confusion among customers - whether intentionally caused or not - about how these operate.

When I spoke at a local Law Society meeting after these comments appeared, I was challenged about their accuracy. I think it is important to say that when we go out and make this sort of statement, it is based on real observation. At the Legal Ombudsman, myself and my fellow ombudsmen encounter countless examples of ­customers who have ended up ­incurring costs they simply were not expecting. And our position is simple: if a product is marketed as ‘fixed fee’ then we do not expect to see additional costs lumped on top at the end of a case, especially if no indication that this might happen is given throughout. Similarly, insurance policies need to be just that, not a Lottery ticket, which may or may not cover a customer’s legal expenses when they are relying on it.

Take the following examples:

No winners

Mr A engaged a law firm to take up cases against several previous employers for industrial illness. Mr A and his lawyer made a ‘no win, no fee’ agreement, but the firm failed to fill in the forms for the indemnity insurance. Several of the cases failed and the firm agreed to pay Mr A’s legal expenses for these cases. The firm was unwilling to continue work on the other two claims. Mr A contacted a second firm which also refused to take on the cases as it felt that the first firm had made too many mistakes. Mr A returned to the first firm and formally complained.

The firm responded that it was unable to continue with the remaining cases and insisted that it was not responsible for the costs of the ­defendants. Mr A came to the Legal Ombudsman. He wanted to drop the outstanding cases and for the firm to agree to be responsible for any of the defendants’ costs. The LeO managed to resolve the complaint informally and the firm agreed that it would discontinue the live claims and indemnify Mr A against any costs and liabilities.

Fantasy fixed fees

Mr B needed a lawyer to help him take on his former employer for unfair ­dismissal. However, he wanted the assurance of a fixed-fee service as he had a tight budget to work with. He instructed a firm which agreed that its fee would be 35% of any damages awarded to Mr B should the case be successful. Shortly before the hearing, Mr B’s case was settled out of court, much to Mr B’s satisfaction. Unfortunately, his lawyer had failed to pursue the other side for their costs and subsequently tried to use more of Mr B’s damages to cover them.

The lawyer advised that in addition to 35% of the damages in respect of the fees, Mr B would be required to pay for disbursements and telephone calls, meaning he would actually stand to lose more than 50% of the damages awarded. Mr B was obviously unimpressed and made a complaint to the firm, but it disagreed that it had misled him over cost. Mr B then brought his complaint to the Legal Ombudsman. Following an investigation, we found that the firm had failed to warn Mr B about ­disbursements and any potential costs incurred by the other side. We told the firm to refund Mr B £500, which it agreed to do.

Insurance shortfall

Mrs C instructed a firm to assist with an employment tribunal and funded it using before-the-event insurance. Following a court case Mrs C was awarded £25,000 but only received £19,000 after her lawyers took a cut from the payout to cover costs, which they claimed were not covered by the insurance policy. The law firm did this despite agreeing to inform Mrs C of any costs that would not be covered by insurance at the start of the case.

After failing to resolve her complaint through the firm’s own complaints process, Mrs C brought her complaint to the LeO for investigation. It was subsequently found that the complainant had not been provided with adequate costs information and some of what she was asked to pay included costs that the firm could not substantiate with the insurers. As it was unreasonable for the firm to pass on all of these costs to the complainant - and due to the fact it did not keep Mrs C informed of extra costs throughout the case - we decided that the firm should reimburse the £5,000 shortfall.

Learning lessons

As the changes in legal aid take effect and render more people reliant upon these new, more commercially viable funding methods, it is fair to assume that we may see more of this confusion leading to complaints. And part of my job - at least as I see it - is to anticipate the issue and hopefully give both the profession and consumers a ‘heads-up’. Which is not to say that I am intrinsically against those sort of funding models: indeed, I expressed some support for innovation in the way lawyers charge in our thematic report on costs. I think it is inevitable that legal insurance will become more prevalent and it is a product which has its place. I also think conditional and fixed-fee arrangements are great for customers on a shoestring budget - as many people are in the current economic climate. These too should be part of the legal landscape.

My issue is not with these products or services. The complaints I see tend to crop up when these products and services deviate from what they are claiming to offer. If they did exactly what it says on the tin, every time, we would have far fewer complaints to investigate and this must surely be the aspiration of any firm offering them.

It is only through reporting on the causes of complaints that lessons can be learnt about how to prevent them. This is something we will ­continue to do. So, for example, we are currently planning our next thematic report, which is likely to be on conveyancing. If we have feedback to give, we do not want to wait until the next Annual Report to give it.

Adam Sampson is chief ombudsman