Slashing the basic RTA portal fee from £1,200 to £500 will cost claimant lawyers £200m a year, the Ministry of Justice has estimated.
It has also argued that it would be wrong to assume that referral fees were not taken into account when the £1,200 was agreed.
The impact assessment published alongside yesterday’s decision to press ahead with the portal reforms admitted that the government does not know “exactly how many cases will be affected” by the cut in fees, as the Jackson reforms could also impact the volume of cases.
“Assuming that 2011/12 volumes of protocol settlements (around 300,000 cases) remain, the aggregate cost to claimant lawyers of [the reform] would be around £200m,” it said.
However, the assessment said there were potential benefits to claimant solicitors in having more cases within a defined process. “Simplified, more uniform and more predictable processes applied to a large volume of similar claims may support additional case processing efficiencies, and might support new forms of business models.
“The ongoing costs of processing claims may fall as a result. The extent of these administrative and processing savings is not known and has not been monetised.”
Extending the portal and introducing fixed recoverable costs (FRCs) for cases which fall out of it will also reduce the ‘costs of the costs’, it said.
Defendant insurers would conversely benefit to the tune of £200m but would also face earlier payouts.
The assessment predicted that claimants would benefit from having to pay lower success fees, as well as from earlier payment and quicker resolution of their claims.
The main consultation response document said the government does not accept the argument that because the current rates were calculated without any reference to referral or marketing fees, FRCs should not be reduced on account of the referral fee ban.
It said: “The government considers that it would have been commercially illogical for claimant lawyers to have negotiated FRC levels which did not enable them to meet their costs (including referral fees). Even if referral fees were not separately identified as a cost during the negotiations, it would be wrong to deduce from this that they were not accounted for at all…
“In any event, whatever the basis of the negotiations leading to the setting of FRCs at their current level, the FRCs set as a result of those negotiations were evidently set at a level which enabled the average claimant solicitors’ firm to cover its outgoings and operate commercially, even though many of these firms paid referral fees.
“That being so, it is reasonable to assume that FRCs could now be reduced – whilst still enabling these solicitors’ firms to operate commercially – once referral fees are abolished, unless there was evidence to suggest that the abolition of referral fees would lead to an inevitable and commensurate increase in other costs, such as advertising.”
Dismissing the argument also that firms which do not pay referral fees may pay up to £500 in marketing costs, it said “marketing costs were likely to have been treated in the same way in the original costs negotiations as referral fees. The government therefore considers that the referral fee ban provides reasonable grounds for considering that current FRCs should be lower in future”.
The government also said it received “insufficient evidence” to suggest that £500 does not accurately enough reflect the amount and nature of work required to deal with most straightforward, liability admitted claims worth less than £10,000.
Taking on arguments about reductions in access to justice and in the quality of legal advice as a result of the reduced FRCs, the government said solicitors will be able to charge higher success fees than now and also use damages-based agreements. This could lead to “more competitiveness and flexibility in the market”, meaning it will not be more difficult to obtain legal advice in the future.
It also predicted that “claimant lawyers remaining in the market will be likely to take on the cases left by any who have chosen to exit”.
However, the impact assessment – while prepared on the assumption that claimant lawyers would be as willing to bring cases as they are now – acknowledged that there was a risk this might not happen in “cases which are relatively more expensive to process”.
Other risks were that solicitors would reduce client care – but they “would still be required to operate in accordance with professional standards so the scope of any risk of worse customer experience might be limited” – and that there might be incentives for solicitors to undersettle so as to process a case quickly.
“Whether this risk materialises would depend upon the behaviour of defendants (insurers) in such settlement negotiations.”
- Direct Line’s 2012 results, published today, showed a fall in referral fee income from £27.9m to £21.1m; vehicle replacement referral income also fell and Direct Line said these “primarily reflected a reduction in non-fault claims volumes”. The company predicted that the impact of the civil justice reforms would be “net neutral” in the medium term. “However, there remains considerable uncertainty about the details and timing of the reforms.”