PI, efficiency and conflicts of interest

file0001308480084There is a strong and important test of the SRAs regulatory model coming. The challenge comes from what claimant lawyers call claimant capture. Already a model with some history, Direct Line have applied for an ABS licence with Parabis Law. According to LegalFuturesthe legal business is not expected to make a “material contribution” to the group’s profits.” My speculation on the meaning behind that statement will become clearer if you read on.

Direct Line presumably want to replace some or all of the £110m in referral fees and £50m from credit hire referral fees it is reported as earning in the last three and a half years with claimant costs recovered from other insurers. It proposes to protect its policy holder customers from the cost of paying success to other claimant solicitors. We do not yet know how often such charges will be made by non-Direct Line lawyers. The protection may have limited value. It is often reported that solicitors will be reluctant to charge clients success fees – I imagine some will and some won’t; but the possibility is enough to provide Direct Line with a marketing lever. Their policy holders will be offered a free lawyer; the process of transferring instructions will be slick and probably painless; and it will allow them to opt out of the more expensive service they will be encouraged to expect should the go elsewhere (one can imagine how there will also be an emphasis on the potential for the alternatives to be slow and otherwise unsatisfactory). If you want an analogue think of the way estate agents recommend conveyancers; except, I will wager, slicker and more efficient.

The benefit for Direct Line is in minimising its legal costs either generally (if other insurers follow suit); getting claim fees in; or should the claims firm be allowed to make claims where Direct Line is the insurer, settling its own cases quickly. It may be possible to design ways of doing the latter which do not fall foul of the solicitors rules. Imagine, for instance, the client is offered a solicitor elsewhere (which may cost more) or the ability to settle their claim quickly by talking to Direct Line’s solicitors if they are claiming against Direct Line (the new ABS or an other service). It may be that the insured does not appreciate who the lawyer’s client is, and this confusion may accelerate where the firm otherwise holds itself out as a claimant firm. Those involved will protect themselves with informed consent procedures which look fine on paper; perhaps less strong in practice.

Now, it should be stated plainly that there is the potential for consumer benefit in all of this. Such processes might speed up claim handling. Referral fees Recruitment costs for such clients are reduced. And if the new ABSs lawyers are on their mettle, properly managed and incentivised, then they might be quicker, cheaper – Direct Line will presumably be more inclined to settle with their ‘own’ firm – and provide decent outcomes, or as decent as are needed to keep the policy holders and claimants happy. After all, the bulk of personal injury claims are low(ish) value and – Direct Line might wager – the British Public might be see the process as more akin to, well, making an insurance claim than fighting for their “rights” or for “access to justice”, at least where road traffic claims are concerned.

There are though, a whole raft of ifs, buts and mights along this particular road. At root: there is a significant structural conflict of interest involved in allowing insures to run claimant ABSs. That conflict may apply to individual cases or have a more general market wide impact. After all, one of Direct Line’s managing directors has almost simultaneously with this announcement argued for lower general damages (not that that is an anathema, but a debate about generals might include the possibility for them to go up rather than down). It will be very interesting to see how the SRA approach such applications. I rather suspect that they will ask questions about management structures and rules on conflicts rather than look at the fundamentals and the broader context within which the ABS works. It would be interesting to know how closely the ABS fits with other elements of the claims process and the work Direct Line and Parabis conduct.

I have rather large doubts about the efficacy of a narrow rules based approach, even one applied in a risk-based analysis. Knowing about, or managing, conflicts of interest is not much researched but where it is it suggests that conventional mechanisms are not very successful in protecting against substantive conflict. The key to whether claimant capture, or something close to it, is in the public interest is in understanding what outcomes those claimants get. Outcome focused regulation in the most meaningful sense of the word. Claimant lawyers already brandish examples of claimant capture that look appalling, but there is the potential for them to be atypical. Someone needs to take a more objective look.

If the SRA grants such an application, then it should consider requiring the ABSs to report on key outcome data. Requests to handle claims turned down; damages recovered and paid to clients; and, types of claim would be my starting point. And that data should be auditable. Indeed, it should consider doing it generally, especially for high volume providers of personal injury services. Such providers should be, probably are, collecting such information themselves. Only through monitoring results can the regulator begin to get a handle on whether new and potentially dangerous innovations in legal service provision are acting appropriately. If it had been doing so already, incidentally, we would have a basis for evaluating the impact of the Jackson reforms where it counts most: the results.

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