article
Obeying the code
8 October 2009
In the past ten years there has been a revolution in the way in
which litigation, particularly personal injury litigation, is
conducted. Only ten years ago the Access to Justice Act allowed
solicitors to act on a “no win no fee” basis. Solicitors were then
allowed to advertise for business. Finally there was a change in
the Solicitors’ Referral Code allowing solicitors to pay referral
fees.
In tandem with these changes there has been a huge rise in
claims management companies which act as an intermediary between
the general public and law firms. Many law firms use claims
management companies as a quasi marketing company seeing the
payment of a referral fee as a marketing expense.
However there are many pitfalls for the unwary both from a
professional and regulatory viewpoint.
Since the Compensation Act 2006 was brought in claims management
companies have been regulated. Although it may sound obvious, it is
important for solicitors to ensure that they are only dealing with
claims management companies which are regulated. Solicitors may
face fines or disciplinary action if they do not.
Solicitors need to ensure that the companies with whom they
contract comply with the Solicitor’s Code of Conduct. Again default
could lead to disciplinary action and a fine. Although this again
sounds obvious when the SRA carried out a survey into 149 referral
arrangements at the end of 2007 it found that in 48% of cases
solicitors had not extracted an undertaking from the company that
they complied with the conduct code.
Solicitors also should make sure that clients are given relevant
information relating to any commission. Rule 2.06 of the Code of
Conduct states “if you are a Principal in a firm you must ensure
that your firm pays to your client commission received over £20
unless the client, having been told the amount, or the precise
amount is not known, an approximate amount or how the amount is to
be calculated, has agreed that your firm may keep it”. The SRA
survey found that 48% of firms did not comply with this rule.
It is important to keep track of advice being given by the SRA
in relation to claims management companies. Earlier this year
concern was raised about a minority of claims management companies
who were making claims that they could assist people in wiping out
their debts and complaints raised about misleading marketing. In
February 2009 the SRA warned that solicitors would be vulnerable to
disciplinary action if they purchased consumer credit claims from
claims managers. As of April ten firms were being investigated in
this regard.
Many arrangements mean that solicitors are tied into an
agreement with one insurer for the provision of after the event
(“ATE”) insurance. An important question is whether this breaches
the Code of Conduct and also would that affect the quality of
advice being given by the solicitor. The Court of Appeal looked at
the question in the Accident Line Protect test cases. From that
case it can be gleaned that:
- Membership of a panel in itself does not necessarily amount to
an interest.
- Exclusivity would also not necessarily in itself amount to an
interest.
- One has to look at the circumstances to see if a conflict was
created. In this case the revenue created from the insurers
amounted to between 0.15% and 4.57% of the firms’ turnover. That
was not seen as being significant.
- Even if an interest were to be found that is not the end of the
matter. One would need to go on to explore the nature of the
interest but a solicitor would be under an obligation to advise his
client as to the benefits he would derive from membership of that
scheme.
A solicitor must also be satisfied that he is acting in the best
interests of the client and in accordance with Rule 1 of the Code
of Conduct. A case which recently came before the Solicitors
Disciplinary Tribunal (SDT) is illustrative of what can go wrong in
these relationships. Mr Tilbury worked with a claims management
company called Justice Direct. As part of the relationship the
client paid 25% of his damages to Justice Direct. The SDT found
that no competent solicitor could recommend agreement to this
arrangement to his client. They also felt that the arrangement
limited a client’s freedom of choice and also created a conflict of
interest. Mr Tilbury was fined £5000 and was ordered to pay costs
of £15,000.
Therefore the message for solicitors is that any contract with a
claims management company, and particularly one with an attached
insurance product, needs proper risk management and an assessment
made that the firm is satisfied that it is not breaching the Code
of Conduct.
This article was first published in Legal
Week
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