Referral fees in the UK personal injury sector will be banned under new proposals announced this month by Justice minister Jonathan Djanogly. If passed by Parliament, the proposals are likely to lead to a wider ban on the fees, which are typically paid by one law firm to another in return for clients and casework. They may also be paid between claims management companies, or between law firms and insurance providers in cases where those insurers successfully recommend legal representatives to their clients.

In any chain of referrals, the fees tend to rise the higher the client is passed up the line, and the Ministry of Justice (MoJ) is keen to tackle the impacts of this escalation. ‘We will ban referral fees and we will go further,’ said Djanogly. ‘We have proposals before Parliament to end the bizarre situation in which people have no stake in the legal costs their cases bring. This will make claimants think harder about whether to sue and give insurance companies and businesses generally an incentive to pass the savings onto customers through lower prices.’

Djanogly added: ‘Referral fees are one symptom of the compensation culture problem and too much money sloshing through the system. People are being encouraged to sue, at no risk to themselves – leaving schools, businesses and individuals living in fear of being dragged to the courts for simply going about daily life.’ The UK’s compensation culture, he argued, had bred a situation in which ‘middle men make a tidy profit that the rest of us end up paying for through higher insurance premiums and higher prices’.

Referral fees have been the focus of fierce debate between two of the UK’s leading organisations in the legal sector. As NewLegal Review reported in October 2010, the Legal Services Board (LSB) – founded to implement reforms flowing from the 2007 Legal Services Act – spoke out against full-scale prohibition. ‘We are committed to proportionate intervention,’ said LSB chief David Edmonds. ‘Our hypothesis is that neither an outright ban nor a laissez-faire free-for-all would be appropriate. Instead, we suggest that clear obligations on transparency would preserve the beneficial impacts of the arrangements, while addressing concerns about consumer choice.’ In June, the group strengthened its position following an industry-wide consultation. Edmonds argued that, as part of its remit, the LSB should administrate referral fees via a set of guidelines policed by approved regulators.

That stance brought the LSB into direct conflict with the Law Society of England and Wales. Concerned primarily with access to justice, the society countered that referral fees ‘add no value to the system and line the pockets of intermediaries that simply make money – ultimately paid by consumers – out of directing consumers to solicitors’. The government’s plans for the personal injury field, where referral fees are most common, would suggest that it has sided with the Law Society on the issue, and has followed key recommendations from Lord Justice Jackson’s Civil Litigation Costs Review of early 2010.