‘(1) A regulated person is in breach of this section if—
(a) the regulated person refers prescribed legal business to another person and is paid or has been paid for the referral, or
(b) prescribed legal business is referred to the regulated person, and the regulated person pays or has paid for the referral.
(2) A regulated person is also in breach of this section if in providing legal services in the course of prescribed legal business the regulated person—
(a) arranges for another person to provide services to the client, and
(b) is paid or has been paid for making the arrangement.
(3) Section [Regulators and regulated persons] defines “regulated person”.
(4) “Prescribed legal business” means business that involves the provision of legal services to a client, where—
(a) the legal services relate to a claim or potential claim for damages for personal injury or death, or
(b) the business is of a description specified in regulations made by the Lord Chancellor.
(5) There is a referral of prescribed legal business if—
(a) a person provides information to another,
(b) it is information that a provider of legal services would need to make an offer to the client to provide relevant services, and
(c) the person providing the information is not the client;
and “relevant services” means any of the legal services that the business involves.
(6) “Legal services” means services provided by a person which consist of or include legal activities (within the meaning of the Legal Services Act 2007) carried on by or on behalf of that person; and a provider of legal services is a person authorised to carry on a reserved legal activity within the meaning of that Act.
(a) where subsection (4)(a) applies, means the person who makes or would made the claim;
(b) where subsection (4)(b) applies, has the meaning given by the regulations.
(8) Payment includes any form of consideration (but does not include the provision of hospitality that is reasonable in the circumstances).’.—(Mr Djanogly.)
Brought up, and read the First time.
With this it will be convenient to discuss the following: Amendment (a), after first ‘paid’ in (1)(a), insert
‘will be paid, has made an agreement to be paid,’.
Amendment (b), after ‘pays’ in (1)(b), insert
‘will pay, has made an agreement to pay’.
Amendment (c), after first ‘paid’ in (2)(b), insert
‘will be paid, has made an agreement to be paid,’.
Amendment (e), at end of (4)(b), insert—
‘(2A) A breach of the provisions of this section shall be an offence, punishable on summary conviction by a fine not exceeding the statutory maximum or on indictment for a term of imprisonment not exceeding two years, or a fine, or both.’.
Government new clause 19—Effect of the rules against referral fees—
‘(1) The relevant regulator must ensure that it has appropriate arrangements for monitoring and enforcing the restrictions imposed on regulated persons by section [Rules against referral fees].
(2) A regulator may make rules for the purposes of subsection (1).
(3) The rules may in particular provide for the relevant regulator to exercise in relation to anything done in breach of that section any powers (subject to subsections (5) and (6)) that the regulator would have in relation to anything done by the regulated person in breach of another restriction.
(5) A breach of section [Rules against referral fees]—
(a) does not make a person guilty of an offence, and
(b) does not give rise to a right of action for breach of statutory duty.
(6) A breach of section [Rules against referral fees] does not make anything void or unenforceable, but a contract to make or pay for a referral or arrangement in breach of that section is unenforceable.
(7) Subsection (8) applies in a case where—
(a) a referral of prescribed legal business has been made by or to a regulated person, or
(b) a regulated person has made an arrangement as mentioned in section [Rules against referral fees](2)(a), and it appears to the regulator that a payment made to or by the regulated person may be a payment for the referral or for making the arrangement (a “referral fee”).
(8) Rules under subsection (2) may provide for the payment to be treated as a referral fee unless the regulated person shows that the payment was made—
(a) as consideration for the provision of services, or
(b) for another reason, and not as a referral fee.
(9) For the purposes of provision made by virtue of subsection (8) a payment that would otherwise be regarded as consideration for the provision of services of any description may be treated as a referral fee if it exceeds the amount specified in relation to services of that description in regulations made by the Lord Chancellor.’.
Amendment (a) to new clause 19, leave out subsection 5.
Amendment (b), leave out from ‘services’ in (8)(a) to end of paragraph (b) and insert
‘but only where the consideration was proportionate and reasonable in the circumstances.’.
Government new clause 20—Regulation by the FSA.
Government new clause 21—Regulators and regulated persons.
Government new clause 22—Referral fees: regulations.
Government amendment 139.
New clauses 18 to 22 seek to prohibit the payment and receipt of referral fees in personal injury cases by regulated persons, namely solicitors, barristers, claim management companies and insurers.
I pay tribute at the outset to the work of Mr Straw in pursuing the case for a ban on referral fees. I know that there are some differences between us about the detail of how we should implement the ban—we will come to his amendments in due course—but those differences of detail should not obscure our agreement in principle on tackling this important issue. I acknowledge his efforts in this regard.
I must also mention the consistent campaign by Sir Alan Beith as Chair of the Justice Committee, who has also been a very keen supporter of the ban. I note that last week his Committee formally welcomed our commitment to the ban, which will be implemented by these clauses. I should also acknowledge the work of the Transport Committee, chaired by Mrs Ellman, before whom I was privileged to appear last month.
My right hon. and learned Friend the Secretary of State for Justice announced the Government’s intention to ban the payment and receipt of referral fees in personal injury cases by way of a written ministerial statement to the House on
I strongly believe that the current arrangements under which lawyers and others are able to pay and receive fees for referring work have led to both higher costs and the growth of an industry that pursues claimants for profit. By introducing the new clause, the Government are taking decisive and much needed action to remove these incentives.
Right hon. and hon. Members will be aware that Lord Justice Jackson recommended that referral fees should be banned as part of his comprehensive package of recommendations to make the costs of the civil litigation more proportionate and this recommendation was echoed by Lord Young in his report “Common Sense Common Safety”. The Bill already includes provisions to implement the other key elements of those recommendations. The referral fees ban under our new clause will complement the wider Jackson reform already in the Bill by further reducing the costs of personal injury litigation and deterring frivolous or unnecessary claims from being pursued in the courts.
The new clause creates a regulatory offence for any breach of the prohibition. It will be for the appropriate regulators, for example the Law Society, the Financial Services Authority or the claims management regulator, to enforce the prohibition. The regulators will also be responsible for taking appropriate action against regulated persons for any breaches. We have thought carefully about how to ensure that all the main players, including insurers, are captured by the ban, which is why there is a separate clause, new clause 20, giving the Treasury powers to make regulations allowing the FSA to enforce the ban under its existing regulatory powers.
There have been calls from some people, but not most people, for the payment and receipt of referral fees to be made a criminal offence. Not least among those who have called for that is the right hon. Member for Blackburn, who has tabled amendment (e) to that effect. We considered the matter carefully but believe that creating a criminal offence would be a very blunt instrument in this case. One would have to prove beyond reasonable doubt that consideration had changed hands for the referral of a potential claimant, but the grounds for determining whether something was or was not a referral fee could be blurred. It would be very difficult to convict in many cases on the basis of the complexity of those arrangements. That is why we consider a regulatory offence to be more appropriate, whereby the principle of what is happening can be looked at by the regulator and a view can be taken.
I am conscious that a criminal offence would impose additional costs on the police and the courts in investigating and enforcing a ban. I believe that a regulatory prohibition covering all the main players in the sector, including lawyers, claims management companies and insurers, is the most appropriate and effective response to the issue. I am confident that the industry regulators are best placed to investigate and enforce the regulatory ban.
As my hon. Friend has indicated, I strongly support the action he is taking, but is it not the case that in many of those circumstances a criminal offence may well have been committed by way of a breach of the Data Protection Act 1998? The problem then is that custodial sentences are not available for someone who is doing that on a large scale and making a great deal of money by releasing personal information and committing a criminal offence.
My right hon. Friend makes a good point. It is not one that is covered by the Bill, but it is something that the Government are looking into, and I hope that there will be further developments on that in due course.
I thank the Minister for the generous compliment he paid me, for which I am most grateful. There are plenty of situations relating to financial institutions in the widest sense when conduct might be the subject of a regulatory breach enforced by the regulators, but in more severe cases it could also be a criminal offence. It is a matter of belt and braces. Frankly, I do not understand why he is suggesting that those are alternatives when one complements the other.
The reason is that criminalisation would be too blunt an instrument. If we take the example of the straight payment of a fee for a referral, I can see how straight criminalisation would work, but we should appreciate that when that was last banned in 2004 it was a weak provision through which a coach and horses could be driven. What if an insurance company provides insurance to a solicitor in payment for referrals, rather than a straight fee? What if a trade union gives its cheap work to a firm of solicitors in consideration for the solicitors getting its better work? What if a claims management company provides a variety of services to a solicitor in payment for a referral? The point I am making is that the circumstances could be very varied and complex and the straight criminal option would not be appropriate. It would be the principle that counts and it would have to be a regulator that looks to the principle.
We are primarily concerned with removing incentives under the current system with regard to personal injury claims, which is why we are banning referral fees in that area. However, the Lord Chancellor may in future extend by regulation the prohibition on referral fees to other types of claim and legal services and other providers of legal services should the need arise and if the case is made for such an extension.
Is the Minister not concerned that that might introduce an element of uncertainty? Although I note what he says about the possibility of extending the provisions to other structures in future, is he not aware that alternative business structures will now be set up by large companies to get around the provisions? How will he address that?
Alternative business structures will be set up by the Solicitors Regulation Authority, probably before or just after the end of this year, so the hon. Lady makes an important point. At that stage, claims management companies will be able to purchase solicitors, and vice versa, which means that it would indeed be possible, as we discussed in the Transport Committee, for a claims management company to own a solicitor and effectively act as the advertising arm of a firm of solicitors. However, the important difference is that the claims management companies will then be regulated by the SRA, which will give consumers a significant amount of comfort.
Referral fees are one of the symptoms of the compensation culture in this country. The Government are determined to put an end to them while at the same time addressing the underlying cause of recoverability of no win, no fee success fees.
Following what my right hon. Friend the shadow Secretary of State for Justice said earlier this afternoon, I rise to discuss proposals that have not been given due scrutiny in Parliament. We are all aware that the Government were bounced into taking action on referral fees only by the sustained campaigning by my right hon. Friend Mr Straw. In their haste to cover up their inaction and disregard of the abuses of the insurance industry, they have failed to consult on their proposals, which are incompetent, ineffective and will lead to problems further down the line. Indeed, it was reported this week that a judicial review has already been launched citing that lack of consultation.
Referral fees are paid by one party to another in exchange for what are essentially sale leads. They are analogous to brokers’ fees, commission for salespeople, marketing agreements or, in the most basic sense, advertising, because each of these represents part of the cost of sales. Every non-monopolistic industry has a cost of sales. Let me take the example of the insurance industry, an industry with which the Minister has more than a passing familiarity. Admiral is the UK’s leading specialist motor insurance company. Last year it received net insurance premium revenue of £288 million, but its total net revenue was £639 million, part of which was made with referral fees. It spent £151 million on the acquisition of insurance contracts and other marketing costs, including brokers’ costs, paying insurance websites and expensive advertising. Those costs drive up premium costs and the desire to make profit also drives up premium prices—Admiral made £283 million in profit last year on its net revenue of £639 million. That is how it works in the insurance industry.
It works in a similar way when law firms pay independent brokers, some of which are known as claims management companies, another area with which the Minister has more than a passing familiarity. They will pay referral fees in order to get leads for their practice. The lawyers often do this because, frankly, they are not very good at sales, marketing or advertising. However, the problems arise in the behaviour that that encourages. Although there are reputable and decent claims management companies out there that bring together those who want help with those who can provide it, there are also many claims farmers, often based overseas, that abuse the system, send unsolicited spam to people’s e-mail accounts and mobile phones and abuse their data.
It is right to deal with people who act in such a way, but the claims management regulator, which until a few weeks ago was the Minister, but which I understand is now the Secretary of State, has proven singularly unable to do so. An internal review of claims management regulation from the Ministry of Justice, dated
“It is evident that many of the more objectionable practices of Claims Management Companies such as cold calling in person, unauthorised marketing in hospitals and using exaggerated marketing claims have been reined in as a result of action taken under CMR.”
Nothing could make clearer what delusions have set in with claims management regulated by the Minister, because we all know from personal experience that the opposite is true and that such abuse is still out there at large and, if anything, is increasing. Our constituents are harassed by claims farmers, and their objectionable messages, but the Department that he has mismanaged for the past year and a half believes it is doing an excellent job. That is why we must take corrective action.
I note what my hon. Friend is saying about the claims regulatory authority, but my experience at the tail end of the miners compensation scheme was that it was effective in driving out of the industry some of the more unscrupulous claims management companies, which were often just front companies that wound up as soon as they had passed the claims on. I caution my hon. Friend not to be too harsh on it.
I am grateful for my hon. Friend’s intervention. I am sure that some companies have been driven out of business, but the everyday experience of hon. Members, and certainly of our constituents, is that the industry is not properly regulated, which is why corrective action must be taken. However, the proposals in the Government’s new clauses are, I fear, insufficient. They are riddled with inconsistencies and loopholes, which is another symptom of the haste with which they were prepared.
“to be treated as a referral fee unless” it can be shown
“that the payment was made…as consideration for the provision of services, or…for another reason”.
The Minister’s impact assessment explains what that means. Claims management companies may adapt their business models so that they are not reliant on referral fees paid by lawyers, or they may move into alternative types of business such as marketing or advertising. That is staggering to those of us who recognise that it is precisely that marketing and advertising, whether on daytime TV adverts or via spam messages, that lead to perceptions of a compensation culture.
What is the point of the new clauses? The truth is that they are an afterthought to a package of changes in the Bill, some of which we will debate tomorrow, that have far more bite but a different purpose. The changes to conditional fee agreements mean that losing defendants—wrongdoers—and their insurers will benefit at the expense of winning claimants—victims—and that is the real objective of the Government’s legislation. Tomorrow, we will seek to overturn those provisions.
As Bob and Sally Dowler have told us; as the lawyers that brought Trafigura to justice have told us; as victims of asbestosis, who have been fighting insurers that simply do want to pay out to hard-working and long-suffering people; as those who have been unfairly dismissed or subject to harassment in the workplace have told us; and as Christopher Jeffries, who was persecuted by the media last Christmas, as he wrote in The Guardian this very day, has told us, the changes are unacceptable. The Government’s proposed changes, which they had thought about and on which they had taken instructions from the insurance industry, are in the Bill, but very little thought has gone into the new clauses before us today, and none would have gone into them had it not been for my right hon. Friend the Member for Blackburn.
In summary, we believe that there is merit in a ban on referral fees as part of a package to stop the abuses that I have talked about. That is why I tabled amendments not just to clamp down on those fees, but to make the payment and solicitation of referral fees in road traffic accident personal injury cases a criminal offence. My right hon. Friend has tabled amendments to new clause 18, and I hope that he will press them to a vote. If he does so, I hope that hon. Members on both sides of the House will join him in the Lobby if the Government still refuse to accept the criminalisation of referral fees.
We sought to make unsolicited text messages and phone calls regarding personal injuries a criminal offence. We would have strengthened the rules against the sale of personal data. We would have restricted whiplash claims by placing a lower limit on the speed at which a vehicle must be travelling before damages may be paid. We would have outlawed third-party capture, another dirty secret of the insurance industry. I freely acknowledge that we plagiarised some of that from my right hon. Friend’s private Member’s Bill.
If the Government had had the courage of the conviction in the Minister’s speeches earlier in the year, we would have got to the heart of the perception of a compensation culture. In doing so, we would have done what the Government are now failing to do. The new clause alone will have little effect. We believe that it deserves further scrutiny, and we hope that amendments in another place will toughen it up, if that does not happen tonight. We also hope that amendments to make these practices criminal offences will be accepted. We therefore have no intention of voting against the new clauses; we simply regard them as not going far enough.
The Minister’s incompetence in getting to grips with claims farmers who engage in unscrupulous practices and his Department’s failure even to recognise the scale of their failure to regulate effectively have got us here. These are symptoms not of a litigation culture, as he would have us believe, and of the rhetoric that goes along with the cuts in legal aid to the poorest, as well the neutering of no win, no fee agreements which will affect almost everyone except the super-rich and will prevent access to justice, but of regulatory incompetence by the Minister’s Department. Indeed, he has now surrendered responsibility for that regulation.
I commend my right hon. Friend’s amendments to the House. We accept the new clauses as far as they go, but it is about time the Government stopped using their rhetoric as a mask for preventing victims from obtaining justice and used it to ensure that the abuses that we all put up with day to day from fraudulent and criminal practices are stamped out.
I shall be brief. I welcome the Government’s action to address referral fees. There is no doubt that consumers have paid a significant price. I hope that we can clamp down heavily on other things, such as unsolicited text messages and spam, which we have all experienced, through other measures such as those on data protection.
I would like the Minister to deal with just one point. The industry has been pressing for these changes, and consumers in particular want to understand what guarantees, if any, they will have that when the changes have taken effect they will see a difference in the prices they pay for services.
As a preliminary, I wish to draw the House’s attention to the fact that against my name on the amendments relating to referral fees there is an R, which indicates that I have a declarable interest. It arises from three engagements that I undertook for fees on matters relating to referral fees and the motor insurance industry generally. They were on
I tabled amendments to new clauses 18 and 19 and, as my hon. Friend Mr Slaughter indicated, in the absence of a sudden Pauline conversion from the Government Front Bench between now and when the question is put, I shall press amendment (e) to new clause 18 to a vote.
According to the AA, over the year to March 2011, there has been a 40% increase in motor insurance premiums. In many areas of the country, mine included, although it is by no means the worst, the increase has been even higher. As a number of colleagues of all parties have pointed out, that has very severe social consequences.
May I say that I am extremely grateful for the wide support that my Motor Insurance Regulation Bill has had throughout the Chamber? Motor insurance is the only insurance affecting an individual that is compulsory, and in certain areas and for certain categories, particularly younger drivers, premiums are now so high as to place motor insurance out of reach altogether. A driving licence is often a necessary qualification for taking a job. In any case, people in areas that are not blessed with a high level of public transport, which means most places outside inner urban areas, need a motor vehicle to go about their business. The increase in premiums, and the fact that they are much higher in some areas than others, is leading to some people not being able to work or move around.
The increase is also unquestionably leading to an increase in criminality, both through people going around uninsured and, increasingly, through people deciding to borrow a friend’s address with a lower-premium postcode. People also fail to disclose relevant information about themselves, to enable them to become insured. It cannot serve any public purpose that we have ended up with such a dysfunctional system.
I readily concede that that has happened because of a nexus of factors going back a number of years. The operation of the conditional fee system was introduced in the Access to Justice Act 1999 for good a reason: it was thought that it would improve access to justice. To some extent that has certainly been true, but as we all know, it has had the unintended consequence of generally —I am not talking the Trafigura case or one or two others—creating an imbalance in the equality of arms between parties on either side of a legal action. It has gratuitously encouraged the so-called compensation culture.
That, in turn, has been compounded by the costs of the road traffic accident electronic portal being too high. In a recent statement, the Minister said that the figure that was introduced when I was Secretary of State had been agreed in the Civil Justice Council. It was agreed to by both sides, which was why I did not interfere with it. I believe there is now widespread agreement that the current fee, of at least £1,200 for claims under £10,000, is at least twice as high as it should be. It is leading to lawyers advertising as two firms at the end of my street in Blackburn do: they have great banners across their windows saying, “Bring your claim in here, we’ll pay you up to £650 in cash for it.” They can do that and still make a profit out of the £1,200, because the actual costs of running the portal are about £100.
Claims for whiplash, which I have described as an invention of the human imagination, undiagnosable except by dodgy doctors employed by claims management companies, have got completely out of control. The level of whiplash claims is not related to the level of accidents or physical injuries. Accidents are reducing, as is the possibility of being injured in an accident, because cars and road engineering are much safer. It is related principally to the density of claims management companies operating in a particular area. The evidence of that is incontrovertible.
I concede to my hon. Friend Mr Jones that the regulators have acted properly on claims management companies in some ways, but the regulatory system established under the Compensation Act 2006, during our Administration, has not had sufficient resources to control the trebling in the number of claims management companies that has taken place in recent years.
Another change that took place was in the 2004 solicitors conduct rules, which allowed solicitors to pay referral fees that were previously banned. I will come back to that point when we deal with the enforcement of a ban on referral fees.
I very much welcome all the effort that the right hon. Gentleman has put into this matter. I hope that in talking about referral fees, he will recognise that although he has devoted a lot of his effort to motor insurance, the same problems affect the cost to consumers in numerous other areas, such as employment law, conveyancing and divorce—all areas in which quite large sums change hands.
I absolutely agree. I began this journey because of constituents’ concerns about motor insurance, and my private Member’s Bill specifically concentrates on that, but I accept entirely what the right hon. Gentleman has been saying for such a long time and what his Justice Committee said in the report that it published two weeks ago—that the ban on referral fees must be extended beyond personal injury cases.
I am anxious for the right hon. Gentleman to reflect on his point about the change in the solicitors rules in 2004. It is important that the House considers the fact that up until that time, referral fees were banned by the Law Society. It was the intervention of the Office of Fair Trading that resulted in the Law Society changing that rule and recommending the creation of a marketplace, which he has rightly described as later becoming a full-scale scam.
I said earlier today outside the House that I believe the reason why the OFT has decided rather late in the day to hold an investigation into market conditions in the motor insurance industry is that it is deeply embarrassed by the position that it took in 2004. In no sense could it be said that referral fees encourage fair trading. They are essentially a fraud on the consumer. Lord Justice Jackson, in his magisterial report, completely demolished the OFT’s case in favour of referral fees.
The other body that should examine its processes is the Legal Services Board. I accept readily the reason why the Secretary of State felt obliged to wait for its consideration of referral fees, but its consumer panel released the most extraordinary report stating that referral fees worked in the public interest. If we examine the basis of its research, we find that a third of the people whom it surveyed had received compensation for things like whiplash.
On any objective consumer evidence, and there is plenty of it, it is perfectly plain that the public collectively do not like what they are learning about how the wider insurance industry operates. They reckon they are being defrauded, and that is absolutely true. In motor insurance, for example, a conservative estimate is that at least £2 billion of the total premium income of £9 billion is additional costs caused by the merry-go-round of referral fees.
My right hon. Friend is correct that in 2004, referral fees were put on a legal footing. However, many years before that it was quite clear that referral fees were being paid in various guises. My hon. Friend John Mann and I raised the scandal that was going on in the miners’ compensation scheme. When we were arguing for that practice to be banned, the Government of the time did not do a great deal about it.
The Government should have done, and as I have sometimes said in respect of that period, my alibi is that I was abroad. I am the last to suggest that the problem has been created by the current Government. I accept that although the Labour Government did many wonderful things, the consequence of a number of things, some of which we introduced and some of which, such as the OFT report, were forced on us, has been the creation of a dysfunctional system.
The fact that this has become an issue for middle England is quite ironic, but I am angry that when my hon. Friend the Member for Bassetlaw and I raised it in respect of poor mining communities, people did not think it was a great priority. Does my right hon. Friend agree that it is ironic that if we had tackled the problem at that time, the scandals in the motor industry that he has outlined would have been put to bed years ago?
That might be so—it is good to know that my constituency is representative of middle England.
Similarly unacceptable practices take place in motor repairs. In bottom-line referrals, accident management companies require repairers to give them a discount of up to 25%. The repairers then increase their prices to take account of that bottom-line referral fee. Royal and Sun Alliance outrageously practised a type of subrogation whereby it set up an internal subsidiary, which contracted repairers for, say, £1,000 for a repair, and then added 25%, which was charged to the main company—RSA Ltd—which then charged the at-fault insurer. Product mandating is another unacceptable practice. Deals are struck with, for example, paint manufacturers, and repair companies are required to use specific brands of paint. That has led to a 67% increase in the cost of paint since 2003.
We must act on all those matters, and I hope the Minister will say briefly what will happen on the RTA portal if he gets the chance. I know that he has indicated that he hopes to take action, but is he sympathetic to what I suggest in respect of whiplash and many other matters?
I come now to the issue between the Minister and me. I welcome new clause 18, and I am grateful to the Secretary of State and the Minister for introducing it. However, for my hon. Friend Mr Jones, Sir Alan Beith and I, there are two issues. First, in my judgment, the breadth of the ban must go wider than personal injury claims. It could be excluded in one or two discrete areas, but in the generality of cases, as the right hon. Gentleman said—he has a great deal of experience—abuse also happens elsewhere.
Secondly, on the question of whether there should be a criminal offence, I noted what Jonathan Evans and my hon. Friend the Member for North Durham said about what happened before 2004, and in a sense, they have made my point. My understanding is that the prohibition on solicitors charging referral fees was in the solicitors conduct rules and that it was not a criminal offence. Those rules changed; it was not that a criminal offence was abolished. I am glad that the Secretary of State proposes to make greater use of the regulatory authorities, and I would not for a moment suggest that that is unnecessary, because it is very necessary. However—this is where, with respect, I found his argument least convincing—there are many other areas of regulation, including, for example, of financial institutions, when conduct that is in clear breach of regulations leads to both a fine or penalty by civil regulatory authorities and a criminal offence. That is particularly true given the vicarious liability requirements imposed by section 7 and others of the Bribery Act 2011.
I applaud what the Secretary of State is doing as far as it goes, but for the life of me, I simply do not understand why, given that he recognises the inadequacy of the 2004 regulatory system and many other things, he does not back that with the criminal law.
I refer the House to my entry in the Register of Members’ Financial Interests.
Given the right hon. Gentleman’s wide experience, can he detect any pattern in relation to those matters where an action by a regulated body constitutes something that could lead both to regulatory action by the regulator and to criminal sanction under the statutes? If so, it would be interesting to know which side of the line the new clause and the matters to which it refers lie.
The hon. and learned Gentlemen may have noticed that I need to research that point, but I have in the back of my mind a number of cases where breaches of regulations are dealt with both by the regulator and in criminal proceedings. He is experienced in the law and will know that plenty of criminal offences are also civil wrongs of some kind in common law or by regulations.
The right hon. Gentleman has an arguable case on the merits of a back-up criminal offence, but will he concede that the system proposed by the Government can be made to work, because it combines the regulatory framework with the criminal offence behind it, particularly if there is a custodial sentence? The data protection offence, which lies behind the Government’s proposal, is already a criminal offence.
Christopher Graham, the distinguished Information Commissioner, made the point that one reason why the penalty for breach of section 55 of the Data Protection Act needs to be increased—as it is by sections 77 and 78 of the Criminal Justice and Immigration Act 2008 to a maximum of two years imprisonment or an unlimited fine—is to send a message to people in those industries that they could end up in prison if they go in for an egregious breach. Of course, other breaches of data protection rules could mean that an organisation loses its licence, but in extremis, we need criminal proceedings for a criminal offence.
My view is that the same must apply in respect of breaches of the law banning referral fees. My amendment (e) would produce exactly the same penalty—it is entirely proportionate—as applies under sections 77 and 78 of the 2008 Act, which I hope the Government bring into force quickly given that they are already on the statute book. With that, and because I know that many others wish to speak, I thank Members on both sides of the House for the support that they have given to my campaign, and commend the amendment to the House.
It is a great pleasure to follow Mr Straw, who put his case so comprehensively and convincingly.
I should like to speak briefly in support of the Government’s position and to ask a question of clarification. Clearly, referral fees and how they work have contributed enormously to the insurance costs of people in Blackburn, East Hampshire, middle England—wherever that is—and everywhere else, and change is needed. We had a strange mini-debate in the Public Bill Committee evidence-taking session on whether there was a compensation culture in this country. Some Opposition Members suggested that there was not and cited the noble Lord Young of Graffham in defence of their case, which is rather a tricky one to argue. Anyone who has received those annoying automated phone calls and text messages, or who has even a glancing familiarity with daytime television, can say that it is intuitive and self-evident that there is a compensation culture.
I understand that one of the original reasons for introducing referral fees was to allow an online market to develop—it was said that that would be a good thing because it might increase competition and access to justice. I shall come back to the online market element in a moment, but the claim that referral fees improve access to justice is at best grossly exaggerated. It might well be that approaching a solicitor with such a case was foreboding 20 years ago, but it is not now, following the development of no win, no fee cases and so on.
It is difficult to say exactly how big the claims management company sector is, but it might be of the order of £0.5 billion, which is enormous. There is nothing wrong with making money, but from a public policy perspective, we must draw a distinction between activities that add value to the individual and those that just take a share of the value chain and ultimately push up costs for everybody else. That is combined with the natural distaste that we have for selling people’s cases as some kind of commodity. Kate Green referred to the ability of industry players to shape-shift. I think that the new clause would effectively prohibit subcontracting, but not, of course, mergers and acquisitions, which would simply create a new form.
I want, however, to talk specifically about the online marketplace. There is a sliding scale with referral fees: at one extreme, we have ambulance chasers, insurance companies and garages selling hot leads, while at the other end of the scale, we have a Google search, for which, in a sense, a referral fee is also paid. Somewhere in the middle are the trade unions, with the Labour party having, of course, enjoyed significant income from referral fees. However, I want to talk about the online aspect. Presumably, nobody would object to a Google search fee as a marketing cost, but it is in the nature of these industries—we see it with cost comparison websites, for example—that consolidated intermediaries emerge who pay the search engines a certain amount of money, but then charge the customer, which in this case would be the law firm, a greater amount of money. Does that count as a referral fee? Given that technology for consumer targeting improves over time, it might be possible, on social media for example, to identify people likely to have had a recent accident. That would involve a much higher marketing cost per contact, but would it count as a referral fee?
I hope that the Minister can clarify exactly how the regulations are intended to work. Obviously, that would be a matter for the regulator, but I am keen to hear the Government’s intention.
I welcome tonight’s discussion about action on referral fees. In March, the Transport Committee produced a report in which we investigated the reasons for the 40% increase in premiums for private motor insurance. We identified referral fees as one of the reasons. The others included cold calling, inflated bills, high accident rates among young people, fraud and uninsured driving. However, I seek clarification on two areas from the Minister, although some of these points have been raised in earlier contributions.
The first issue is the scope of the Government’s proposals. The Committee’s report referred to the merry-go-round of referral fees and identified not only solicitors, but credit hire firms, vehicle repairers, medical experts and management accident firms. I am not clear from the Minister’s explanation of the new clause whether all, or some, of these organisations will be included in the proposals. If we are looking at referral fees as a reason for the greatly increased costs of motor insurance premiums, it is not good enough to look only at solicitors; we have to look at all these other areas as well.
The second area relates to how companies would be prevented from finding ways of avoiding the new legislation. When the Committee conducted its first inquiry on this issue, we received evidence that if referral fees were banned claims management companies would buy solicitors’ practices and, under the plans for alternative business structures, it could be normal for non-legally qualified individuals to do so. On the face of it, it seems that there would be an easy way of avoiding the legislation. I have not heard anything in detail about how that would be addressed. The Minister is correct that he was asked that question when he came before the Committee two weeks ago, but we received no clear explanation of how the issue would be addressed.
Those are the points that I wished to raise tonight. I know that I shall have other opportunities to look more broadly at the rising costs of motor insurance, but tonight, in this debate on action to be taken over referral fees, I ask for further explanation about how the Government’s proposals will deal with those two important points.
I, fortunately, have not been the victim of a car crash or accident at work, although, judging from the volume of texts, e-mail messages and voice calls to my mobile and home phone one might believe that I was confined to a hospital bed or wheelchair. This is one of the aspects that have to be combated in legislation. I therefore support what the Government are doing in trying to prevent this type of activity, although I would like clarification from the Minister on three issues.
My hon. Friend Damian Hinds alluded to the first matter: the definition of “referral fee” and the potential for people to get around it. That is rather important, particularly given that it has been suggested that we make it a criminal offence. While the definition lacks clarity, it will be difficult to make it a criminal offence.
The second important issue is fairness for the individual. If a victim of an accident—for example, someone who has suffered a spinal injury—goes along to their high street solicitor for advice and help, the firm might decide to give that help and advice and start the case, but somewhere along the line it might determine that it does not have the expertise necessary and refer it to an expert solicitor who deals with nothing but such claims. How will the first solicitor be recompensed for their work, if they cannot claim a referral fee? I would like clarification on that point, because, quite clearly, that would require a great deal of professional work for which the solicitor might not receive any recompense. That needs to be clarified.
Surely, the firm would get paid for the costs it had incurred. Indeed, it would not pass on the file until its costs had been paid. Does the hon. Gentleman accept that a further defect of referral fees is that they might skew the judgment of the first solicitor advising the client on the best firm to go to? The solicitor might make a decision on the basis not of which is the best firm, but of which is likely to pay the biggest referral fee.
The other problem is that if solicitors did not believe that they would get paid for the work, they might hang on to the case and take it to conclusion, despite not being an expert. That presents a huge risk to the individual, who possibly has a case.
I agree entirely with my right hon. Friend Mr Straw. To put it slightly differently, the hon. Gentleman is quite right that firms might want to hang on to work even after it goes beyond their expertise, so an inducement to pass it on might work. I am not saying that in favour of referral fees, but it does happen, and we have to be aware of it.
He is absolutely right about the definition of referral fees. When the Minister announced, rather hastily, in response to my right hon. Friend, that the Government were banning them, he admitted that he could not define “referral fee”. The hon. Gentleman is absolutely right, therefore, that a number of problems still need to be resolved, but those are questions that he should be putting to his Front Bench team. He should be asking why they have not sorted out these matters, including on his point about text messages.
As I said, I hope to get clarity at the conclusion of the debate, because this is clearly a problem. I would like these illicit text messages and such like to be criminalised, because they are clearly an abuse of the law. Indeed, as my right hon. Friend Sir Alan Beith said, they should be criminalised already under the Data Protection Act, because they constitute an abuse of personal data.
I seek clarity on a third issue: the effect on claims management companies of banning referral fees. I sought advice from Accident Advice Helpline, which is based in my constituency. It informs me that only one in six of its 36,000 cases last year were referred to solicitors, with the rest being screened out. Of those, 70% led to a settlement, with 15% dropped owing to “no involvement”. I could go through all the details of the data, but the reality is that Accident Advice Helpline screens the cases, which costs money. If Accident Advice Helpline does not do that, other solicitors will have to do it, at a cost to themselves. I would therefore like some clarity on what the effect will be and how it is proposed that those companies will be funded so that they do not fall foul of the regulations.
I completely share other hon. Members’ concerns about securing much better protection for the consumer, but given that the amendments have been introduced rather hastily I hope that the Minister will assure us that there will be a level playing field for different business types and, in particular, that access to independent legal advice from independent solicitors will be protected for claimants.
I therefore seek a fuller explanation from the Minister of how it is intended that referral fees will be defined. Specifically, to what extent does he see marketing activity by solicitors and others as covered—or not covered—by the provisions? For example, as has already been suggested, if a high street solicitor takes on some work, but realises that he or she does not have the expertise to pursue the case and therefore refers it to another solicitor and arranges some form of fee sharing, how is it intended that this should be treated under the provisions? Some solicitors have grouped together to pool their marketing budgets. Is the intention of the Minister’s amendments to outlaw pooled marketing completely or to cover it in regulation? It would be useful to have some clarification on that.
I welcome what the Minister said in answer to my earlier intervention about alternative business structures, but I am curious to know what his assessment is of the possibility that more and more large claims management companies will seek to handle all such business in-house and will stop using the services of other legal firms or legal experts. Has he made any assessment of the possibility of the provision of such services being concentrated in a way that reduces consumer choice and independent advice, and will he say what steps he might take to address that?
I welcome the banning of referral fees, and I congratulate the Minister and the Government on doing it. The scandal is that, frankly, it should have been done years ago. My hon. Friend the Member for
Bassetlaw (John Mann) and I campaigned hard to expose the scandal surrounding the miners compensation scheme, which created a feeding frenzy not just for solicitors but for claims management companies. As I have said before—and to answer Bob Blackman—I frankly do not care if they all go bust, because they are not needed in this process. If people need legal advice, they go to a solicitor. Claims management companies have acted like parasites on the access to justice model that we have had in this country for many years.
I find it ironic that my right hon. Friend Mr Straw said that I was referring to Blackburn as a middle-England constituency, because I was not. The fact of the matter is that my hon. Friend the Member for Bassetlaw and I, along with one or two other Members, argued hard about the scandal surrounding the miners compensation scheme. One of the key points was referral fees and the amount of money received not only by solicitors but by unscrupulous trade unions and unscrupulous claims handling companies. The issue was regulated in 2004, with referral fees being made legal. However, in the case of the miners compensation scheme it was quite obvious that referral fees were being paid and that the Law Society was turning a blind eye—I always refer to the Law Society as the best trade union in the world, because it does such a good job of protecting its self-interest.
In the case of the miners compensation scheme, it was an absolute scandal that claims managing companies were springing up like the morning dew, but then disappearing as soon as they had, as it were, harvested the claims in an area, which they did in two ways. There was no internet in those days—many communities do not have access to the internet—so the companies used cold calling to target poor widows and people who were seriously ill, in many cases claiming to be solicitors. Many of my constituents signed up with claims management companies, but anyone who asked them which firm of solicitors they were with would be referred to the claims management company. It came as a great surprise when it was pointed out that the company in question was not legally qualified.
However, the claims management scandal surrounding the miners compensation scheme could not have continued were it not for solicitors being implicated. I find it ironic that the Law Society and solicitors should more or less stand back and say, “This problem’s got out of hand because of these nasty claims management companies”, because they have also been part of the system and have fed the process. Do I think that there is any need for claims management companies? No, I do not. Indeed, some companies involved in the miners compensation scheme lasted only 12 months, because they were wound up once they had harvested an area. Banning referral fees is a welcome step forward. Would I criminalise the practice? Yes, I would, because the principle that those who are injured in any way should receive compensation is right, yet those seeking access to justice—I am not talking about “the consumer”—are not helped by claims handling companies, which just feed off the process.
We in the Labour Government introduced the claims regulation authority. I disagree with my hon. Friend Mr Slaughter, speaking from the Front Bench, because I believe that was the right step forward. I pay tribute to Kevin Rousell and others who helped to set that organisation up, because they introduced regulation for the first time in an area where there was none at all, as well as seeing off some of the most unscrupulous claims handling companies that were feeding off the back of the miners compensation scheme.
However, I suppose I have some issues with the referral fee being banned, and I would like to give an example: the scandal of the Durham Miners Association and its association with Thompsons solicitors, which I have referred to in the Chamber before. One could argue that a referral was not paid in that case. However, the way the scam worked—I have described it before as a “scam”, and I shall continue to do so—was that people had to pay a £20 fee to join the Durham Miners Association. They then had to sign an agreement whereby if they were successful, 7.5% of their compensation was paid back to the Durham Miners Association, even though every penny of the fees in such cases were paid by the Government.
I want some clarity from the Minister on whether such cases would be covered by the provisions dealing with referral fees, because although there was no direct payment by the Durham Miners Association to Thompsons solicitors, there was, in fact, in the sense of the firm getting the cases, because on no occasion were its would-be clients told that they could have gone to any other solicitor and received the same advice and support for absolutely nothing. I would therefore like the Minister to clarify whether that practice will be outlawed under these proposals, because that case involved a lot of people being misled. I was pleased that, following pressure from the claims regulation authority and others, Thompsons had to pay back quite a lot of money—I think the total came to several million pounds—to claimants from whom money had been taken. Indeed, when they heard that they were paying fees for absolutely nothing, many of my constituents were shocked. I would therefore like some clarification on that issue.
The other issue on which I would like some clarification is the role of the Law Society and its regulations. As I have said, we have all known that the scandal has gone on for many years, including before 2004, but if the change is to be robustly enforced, the Law Society has to send the clear message to its members that it will not sanction such practices.
Another issue on which I would like clarification is that of selling insurance. The scandal of the miners compensation scheme related to referral fees being paid to industrial injuries claims companies such as IDC of Ashington. Many of my constituents thought that that was a firm of solicitors, but in fact it was selling on the claims to individual solicitors firms. Part of its scam was that people had to buy the insurance policy that went with the service. The claims handling company was getting a fee from the solicitors, as well as a payment from the insurance premiums.
I congratulate the Minister on banning referral fees, but he must ensure that the multitude of scams that existed to hide the way in which referral fees were being paid before 2004 does not re-emerge. If this is going to work, he must ensure that those who dream up inventive ways of charging referral fees are looked into. I suggest that he talk to the claims management regulator, because it will have seen most of the scams that came to light in relation to the miners compensation scheme. My right hon. Friend the Member for Blackburn has also highlighted some of the scams, or inventive ways in which people can get round the regulation of referral fees. I welcome the ban on referral fees, and I wish the Minister’s proposals well. I would, however, issue a word of warning in that he will need to look out for the various scams that people will come up with in order to get round it.
Like Mr Jones, I had coal mines in my constituency. There were three working mines there, and I saw evidence of the scandal that he described. It was absolutely dreadful in many ways. Today, I want to ask for clarification of the Government’s intentions in two areas. One relates to the broadening of this issue beyond personal injury. New clause 18 provides for the Lord Chancellor to make regulations specifying wider ranges of legal businesses. I hope that there is a clear intention on the Government’s part, probably involving consultation, to move on to all the sectors in which referral fees have the potential to distort or damage competition or to undermine the position of the consumer. I would like a clear indication that the Government are going to examine a number of other areas.
Secondly, the Minister was very helpful earlier on the question of custodial sentences for breaches of the Data Protection Act, and I hope that that means that the Government have moved on from their position of saying, “We’ll have to wait until the end of the Leveson inquiry.” That represented a complete misunderstanding of the situation. The question of custodial sentences for data protection offences is not primarily about the issues that have been raised in the Leveson inquiry about the media; it is about the everyday circumstances of our constituents whose personal information is abused by the organisations that hold it. That matter ought not to have to wait until the completion of an inquiry into a wider range of issues. I hope that the Minister’s earlier helpfulness will be repeated in implementing a measure on which the House has already decided—namely, that there should be a custodial penalty in such cases.
We have had a good, far-ranging debate this afternoon. Given that another important debate needs to be completed by 8 o’clock, I am sorry to say that I shall have to make my way quickly through the points that have been raised. I am pleased to hear at least a grudging agreement in principle with our ban on referral fees from Mr Slaughter. I thank my right hon. Friend Tom Brake and all the other right hon. and hon. Members for their support for our desire to implement the ban. I am pleased that the debate today has been about how that should be done, not about whether it should be done.
The hon. Member for Hammersmith asked why we had not consulted on banning referral fees, and I can tell him that Lord Justice Jackson made 109 recommendations, and it would not have been practical to consult on them all at once. It also made good sense to await the outcome of the Legal Services Board’s work in this area. Many respondents to our consultation on implementing Lord Justice Jackson’s recommendations included their views on referral fees. Those views, along with the work undertaken by the LSB and the Transport Committee, have been carefully considered. The hon. Gentleman clearly raised some serious issues relating to the regulation of claims management companies, but they were not directly relevant to the Bill. I must point out that, in the past year, the Ministry of Justice has cancelled 349 authorisations of CMCs, whereas in the last year of the Labour Government, it cancelled only 35.
Mr Jones asked a number of important questions. If he does not mind, I will write to him about those issues. I can say, however, that under the Compensation Act 2006, it is an offence to provide regulated claims management services unless authorised or exempt. The hon. Gentleman will not be surprised to learn that the exemption applies to trade unions, and that is part of the problem that he rightly highlighted. I was present at the debate that he held on that subject several years ago.
The hon. Member for Hammersmith covered several other matters, but he essentially spoke to tomorrow’s debate, and we will deal with those issues then. My right hon. Friend the Member for Carshalton and Wallington asked about some important aspects relating to the consumer. The Chairman of the Transport Select Committee, Mrs Ellman, rightly mentioned that share premiums had risen by 40% in the last year alone. This is of course a matter of concern, and we have discussed it with the Association of British Insurers. It has said that if the proposals are effected with the other changes to recoverability of success fees in after-the-event insurance, it would hope to see a fall in insurance premiums. I certainly hope that that is a credible position.
As I said at the outset, there is broad support across the House for a ban on referral fees, although there is some disagreement on how best to implement the ban. The right hon. Member for Blackburn spoke to his amendments with typical passion, but I would like to set out briefly why the Government cannot support them. Amendments (a) to (c) to new clause 18 seek to capture within the prohibition all arrangements to pay or receive referral fees, even when a payment has not yet been made. These amendments might have been tabled in support of his amendment to make the payment and receipt of referral fees a criminal offence. However, I am concerned that capturing an agreement to pay referral fees when payment might not have occurred would be very difficult to enforce. A solicitor’s accounts, for example, might well show that a particular payment had been made that could, on the face of it, be a referral fee. However, it is unlikely that agreements, which in some cases might be no more than verbal agreements, could be so readily identified without time-consuming investigation. In any event, we do not think that it is necessary to provide for this eventuality, first because such agreements would be unenforceable under subsection (6) of new clause 19 and, secondly, because whatever might be agreed, the payment of the referral fee would still be prohibited. So, in practice, it is unlikely that a party would enter into an agreement to pay a referral fee when payment would be a breach of the prohibition and the agreement would not be enforceable.
I have already dealt, in moving the new clause, with the arguments against amendment (e), which seeks to create a new criminal offence. I should just reiterate that the Government are fully committed to ensuring that the ban will work effectively.
When I made my point about the banning of referral fees being backed by the criminal law, the Lord Chancellor did not say that he agreed with me, but he did say, on
“We are now considering the way in which to put this into practice, but it is likely to be in the form recommended”—[Hansard, 13 September 2011; Vol. 532, c. 879.]
—that is, a criminal prohibition as well as a regulatory one. He appeared to have an open mind about that, so what has changed since then?
I have just confirmed with my right hon. Friend the Lord Chancellor that, in the next sentence of that quote, he said that he had not committed to creating a criminal offence.
I can assure the right hon. Member for Blackburn that we have thought long and hard about how to achieve this, and I am aware of the concerns raised in the Justice Committee’s recent report on referral fees and the theft of personal data. The Committee’s Chairman made the point again today that the penalties for breaching section 55 of the Data Protection Act were not sufficient. The Government are keeping the question of whether to introduce custodial penalties for section 55 offences under review, and we will respond to the Justice Committee’s report in due course. However, the issue of how to deal with people such as rogue motor garage workers or nurses who are breaking the law by breaching the Data Protection Act is separate from that of how to introduce a new ban on regulated bodies to prevent them from paying referral fees, which they are currently permitted to do. I strongly believe that our ban, which will stop lawyers, claims management companies and insurance companies from paying and receiving referral fees, will remove the incentives for selling personal data from the whole system. That is because there will be no one for the rogue garage, for instance, to sell the data to, as all the people in the system who can make any profit out of handling claims will be prevented from paying referral fees. My hon. Friend Damian Hinds well set out the complexity involved in this instance.
The right hon. Member for Blackburn has also tabled an amendment to alter the way in which legitimate payments for services are defined. The effect of amendment (b) to new clause 19 would be that payments for services would be permitted only if they were
“proportionate and reasonable in the circumstances.”
The Government recognise that there are some completely legitimate practices that involve payments between lawyers and third parties, such as obtaining medical reports, which should continue. However, clause 19 aims to prevent the exchange of referral fees under the guise of those services. The onus would be on the regulated person to show it was made for the provision of services. The effect of subsection (9) of the Government’s new clause 19 would be to enable the Lord Chancellor to make regulations specifying the maximum amount that may be paid for certain services, without it being treated as a referral fee. Therefore amendment (b) is unnecessary.
I must say that I am convinced of the need to have the power to make further regulations, should the need arise. My right hon. Friend Sir Alan Beith rightly brought up the question of extending the scope, and I can tell him that there are no current plans to extend the scope beyond personal injury, although, as he says, this is provided for in the Bill and might be relevant in due course.
We are repeatedly warned that the industry will find ways to circumvent the ban, and payments for services are one way in which it might do this, so having the power to set up regulations is, I agree, correct. I hope I have reassured the right hon. Member for Blackburn that we have the mechanics in place to stop these referral fees continuing to be paid under the guise of payments for services. I urge the right hon. Gentleman not to press his amendments.
Question put and agreed to .
Clause accordingly read a Second time.
Amendment proposed to new clause 18: (e), line 16, at end insert—
‘(2A) A breach of the provisions of this section shall be an offence, punishable on summary conviction by a fine not exceeding the statutory maximum or on indictment for a term of imprisonment not exceeding two years, or a fine, or both.’.—(Mr. Straw . )
The House divided:
Ayes 208, Noes 302.