Solicitors Regulation Authority

Referral arrangements in personal injury cases and the impact of the Legal Aid Sentencing and Punishment of Offenders Act 2012 (LASPO)

Private & Confidential

Dear Sirs

In October 2012, we contacted those of you who we understood to be significantly involved in personal injury work and may have arrangements in place for the referral of such work.

The personal injury market is being significantly reformed following the review of Lord Justice Jackson, who reported in January 2010, and implementation of the ban on referral fees in personal injury cases brought about by the Legal Aid Sentencing and Punishment of Offenders Act 2012 (LASPO), due to be implemented in April.

The purpose of this letter, being sent to COLPs and Authorised Signatories in firms we understand to be involved in personal injury work, is to raise the issue of these changes, highlight the key points that we consider firms should be addressing and provide a signpost to the information being published on our website to assist you, particularly with the introduction of the ban on referral fees.

Lord Jackson has made recommendations about how costs in civil cases could be controlled in the light of concern that costs had become too high. The intention is that the reforms will make costs more proportionate and discourage unnecessary or unmeritorious cases. In particular, those using no-win, no-fee conditional fee agreements (CFAs) will have an interest in controlling the costs that are incurred on their behalf. The current regime, with recoverable success fees and after the event insurance (ATE) premiums, allows claims to be pursued with no real financial risk to claimants and with the threat of excessive costs to the defendant.

The reforms apply across civil litigation, but will have a particular impact in personal injury cases, where no-win, no-fee CFAs are used significantly.

Summary of key changes:

  • No-win, no-fee CFAs remain available in civil cases, but the additional costs involved (success fee and insurance premiums) are no longer payable by the losing side
  • No-win, no-fee damages based agreements (DBAs) are available in civil litigation for the first time
  • Referral fees are banned in personal injury cases
  • Claimants' damages are protected: the fee that a successful claimant has to pay the lawyer—the lawyer's 'success fee' in CFAs, or 'payment' in DBAs—is capped at 25 per cent of the damages recovered, excluding damages for future care and loss
  • General damages for non-pecuniary loss such as pain, suffering and loss of amenity are increased by 10 per cent
  • A new regime of 'qualified one way costs shifting' (QOCS) is introduced in personal injury cases which caps the amount that claimants may have to pay to defendants. Claimants who lose, but whose claims are conducted in accordance with the rules, are protected from having to pay the defendants costs
  • A new sanction on defendants to encourage earlier settlement of claims

Following our earlier letter, we expect you to have considered the impact the ban on referral fees will have on your business and your future plans and consider in particular, whether any arrangements potentially put you in breach of the provisions in LASPO prohibiting the payment and receipt of referral fees in personal injury cases.

Our consultation paper, released 23 October 2012, set out our views, the proposed changes to the SRA Handbook, our Supervision and Enforcement Strategy and also guidance for the profession. The SRA Board on 23 January 2013 approved the changes to the Handbook which will come into effect on 1 April 2013. Two new Mandatory Outcomes will be added to the Handbook, along with Indicative Behaviours.

The outcomes prohibit the payment or receipt of a "prohibited referral fee". "Prohibited referral fee", "payment" and "LASPO" have been defined in the SRA Handbook Glossary.

These outcomes will need to be read alongside the other Outcomes in Chapters 6 and 9 of the Code of Conduct, as well as the SRA Principles and other relevant Outcomes, such as those relating to client care and conflicts of interests.

The most common theme arising from the consultation responses was the need for clarity about the activities that will be permitted and prohibited and there were a number of requests for us to pre-approve arrangements before the ban comes into force. It was clear from the responses that there was scope for interpreting the provisions in LASPO in different ways and for argument about the activities that are prohibited.

Having considered feedback to our consultation and engagement we have had with you and other bodies, we have developed our guidance and Supervision and Enforcement strategy. It will however, be for you to review your current business model and identify whether it is compliant with the ban and where necessary make changes. Where you have concerns about your firm's ability to comply with the ban or the impact the ban will have on your firm, you should be making contact with us/your named Supervisor so that risks identified can be managed at an early stage.

As a risk-based regulator, we aim to target our action at those who present the highest risk to consumers, the public and the regulatory objectives. The information you share with us, through the renewal process and on-going engagement, will help determine our supervisory activity.

For example, in higher risk areas where issues of concern are disclosed we may:

  • use our formal investigatory or regulatory powers; including requests for documentation and attendance of individuals at formal interview
  • working alongside other approved regulators with a view to sharing information and concerns and identifying firms which look to contravene LASPO/our regulatory provisions
  • use our full range of supervisory approaches

In lower risk areas, we are likely to use tools such as for monitoring compliance, for example questionnaires designed to enable you to assess whether your arrangements comply with LAPSO and our regulatory requirements. You may be required to submit confirmation of your assessment to us.

We have been working closely with the Financial Services Authority and Claims Management Regulator to discuss common themes and issues. Going forward we will be sharing information to ensure that, jointly, we are in a position to monitor compliance with the ban and to ensure effective enforcement.

On our website, we have published

Please visit www.sra.org.uk/referralfees for more information.

You may already be engaging with your Supervisor or Relationship Manager with whom you can raise any concerns you may have about the ban on referral fees. Alternatively, our contact details can be found at www.sra.org.uk/contact-us.

Yours sincerely

Agnieszka Scott
Director of Policy