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The government has announced it will implement a ban on referral fees, as well as a reform of ‘no win no fee’ agreements from April, which could significantly impact the claims management industry.

This move is part of the introduction of the primary recommendations contained in Lord Justice Jackson’s Review of Civil Litigation Costs. It will be implemented by the Legal Aid Sentencing and Punishment of Offenders Act 2012 (LASPO), and it will be a regulatory offence to either pay or receive referral fees in personal injury cases.

The ban is expected to affect all the main businesses involved in the area, including solicitors, claim management companies and insurers, and any breaches of the ban would result in regulatory action. While it would not be treated as a criminal matter, law firms that do breach the ban could be fined up to £2,000, with this figure rocketing to £250 million for alternative business structures. In certain circumstances their authorisation or licence may also be revoked. In addition, individuals or companies can also be referred to the Solicitors Disciplinary Tribunal, which has the power to give them an unlimited fine, and also strike them from the roll.

These Civil Justice Reforms are aiming to reform civil litigation funding and costs, fight compensation culture and ultimately, restore balance to the system.

So what does this really mean? While currently it is legal for claims management companies to pass personal injury cases onto specialist lawyers for a fee, this is all set to change come April 1st 2013.

With the move, the government is aiming to tackle ‘compensation culture’. There is a common idea of no win no fee claims that many are nothing more than a get-rich-quick scheme, or a way to land a pleasing lump sum. Indeed, every so often, a case that is frivolous in nature will hit the headlines, and subsequently be used to tar the whole industry with the same brush.

However, writing on Human Law Mediation, solicitor Justin Patten states that this sort of anecdotal evidence is not a safe basis on which to base governmental policy. What’s more, personal injury lawyers are, in general, unlikely to spend time pursuing cases that they do not think they will win.

He noted that if there has been a rise in the money claimed by people, this is more likely to be due to the fact that more and more individuals are aware of their rights – not an increase in so-called ‘compensation culture’.

It is hoped that the new regulations will see a drop in the premiums paid by the average person for certain forms of insurance, however Mr Patten notes that it is more likely that a ban on referral fees will result in fewer claims being made, and higher profits for the insurance companies themselves.

He also noted that a banning of referral fees could see many more people remain ignorant of their rights, and the opportunity they have to seek compensation after an accident or injury.

Furthermore, companies hoping to get around the ban by setting up an alternative business structure may come up against a brick wall.

The Solicitors Regulation Authority (SRA) has warned it may not grant licences to alternative business structures (ABS) that have been set up as a loophole in the law.

It said that it would look carefully at ABS applicants proposed referral arrangements in order to block any business models that are not truly operating as one.

In a consultation paper, the SRA raised concerns about law firms and claims management companies uniting under the label of an ABS.

According to the paper: “Models which suggest an intention to continue as more than one business, with referrals being made between them, may not be licensed, if we believe the referral arrangements will be unlawful.”

Furthermore, the paper also noted that the final details of the ban will not be approved until weeks before it is due to come into effect, making it more difficult for businesses to come up with contingency plans.

According to the SRA, responses to its June paper showed there was scope for interpreting the Legal Aid, Sentencing and Punishment of Offenders Act in different ways. There was also a “lack of clarity”, it said, about which business models would be affected.

Respondents to its consultation flagged up the difference between a marketing fee and referral fee as a particular aspect of confusion. However, the organisation explained that it did not intend to provide law firms with pre-approval of business models.

What can law firms do to prepare for LAPSO then?

According to The Law Society they must notify clients of the potential implications for the removal of legal aid from scope. This means telling clients of the potential implications of the removal of legal aid from scope. For example, if a family is referred to mediation, the process breaks down and they come back to you seeking legal aid to take the matter to court after April 1, legal aid will not be available. This means clients wanting legal aid in such matter must apply by March 31st.

They must also consider whether they are going to undertake run-off work, as the contract allows firms to complete matters that have already been started.

It is also important to consider how they will handle new family clients after April 1st, as these individuals will not be entitled to legal aid unless they are applying for an injunction, are already in mediation or are in possession of evidence of domestic violence.

Furthermore, companies must also ensure they understand the civil scope rules. The Law Society explains this is best achieved by reading schedule 1 of LAPSO, thinking about the cases undertaken by the firm, and considering any cases the company deals with that could fall outside the system.

It is also vital to think about how requests to apply for exceptional funding will be handled, although it is not yet clear how many of these may arise. The government is expecting 6,000 applicants, but it is possible this could be a significant underestimation.

Last, but certainly not least, companies must train their staff in line with the new regulations, ensuring they fully understand how the changes will affect them well in advance of April 2013.