LSB warns regulators over mis-selling risk with damages-based agreements

VAT: quoted fee should include tax and disbursements

The Solicitors Regulation Authority, Bar Standards Board and other regulators must consider whether action is needed to ensure that damages-based agreements (DBAs) are not mis-sold to consumers, the Legal Services Board has warned.

In a letter to the approved regulators, strategy director Crispin Passmore said the LSB has “some doubts about the ability of unsophisticated consumers to choose and use DBAs or compare different DBA agreements in all circumstances”.

This meant that “targeted and proportionate regulation may be needed to minimise any danger of either deliberate or inadvertent mis-selling. There may also be some public interest arguments to be considered in giving clients a clear and controllable stake in managing costs where DBAs are in use”.

Mr Passmore said there needs to be transparency and consistency in the way the costs of DBAs are presented to allow consumers to choose between different providers. “It is arguable that, at least for unsophisticated consumers, providers should have to offer DBAs on an ‘all in’ fee – ie, including disbursements and VAT alongside a clear and consistent presentation of their approach to recoupment.”

He continued: “Law firms are likely to be able to assume the risk on disbursements across volume and price risk into the success fee. The success fee cap in the regulations includes VAT and counsel’s fees, but this does not avoid the risk that advertised prices will exclude it, and nor does it include disbursements beyond counsel fees. The risk with such an approach is, of course, that disbursement-heavy cases are likely to be difficult to take on for smaller firms.”

Targeted, outcomes-focused regulation could make shopping around much more likely, increase downwards pressure on success fees and incentivise law firms to be cost conscious, Mr Passmore said. “Indeed, while in the short term such an approach might be seen as further reducing the cap set out in the legislation, in the longer term a more competitive market facilitated by this level of transparency may see the need for a statutory cap disappear.”

However, such a “restrictive” regulatory approach should not be necessary for sophisticated consumers as they are able to compare providers, he said, so long as there is transparent pricing in place.

The LSB is set to consider DBAs formally before their widespread introduction on 1 April. Ahead of that Mr Passmore asked the regulators for their views and for information on how they plan to approach these risks, and whether formal guidance from the LSB would help.