As we get closer to the big bang that will occur in the world of PI in April, the SRA has released another consultation paper where it has provided a little more guidance on what its plans are for the forthcoming ban on referral fees. Within the paper, the SRA acknowledged that there were concerns that ABSs would allow firms and CMCs to “get round” the ban. Within its response to this concern, it stated:
“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. Applicants will need to demonstrate that they are truly operating as one entity”
Whilst on the face of it this seems a positive statement from the SRA, I do have concerns about what will happen in reality. Any solicitor who is planning to form an ABS with a CMC or an insurer will inevitably be trying to find a way to carry on trading with as little disruption to business as possible. The partners will want to maintain control of the legal side of the business and also continue to share in profits whilst the CMC/Insurer will want to lead on the ‘marketing’ and of course achieve an income which at least matches the previous referral fee income. So, in a nutshell, every ABS is looking for the loophole! Or… maybe I’m wrong; perhaps some of these currently well run independent businesses aren’t all that concerned about control or profit levels?
The SRA and other regulators have been given a thankless task which has been thrust on them by LASPO as very little guidance on what will constitute a breach of the ban has been given. We all know the obvious scenarios that will be unacceptable, but every week I hear of a new idea about how an ABS could work and I’ve lost track of how many colourful pictures I’ve seen with A, B and C shares floating around the page. The diagrams all look pretty similar with marketing flowing into a bubble on a bed of arrows from one side, legal services approaching from the other and then profit gloriously emerging at both ends! I used to think ‘white labelling’ was something to do with washing machines but the colourful pictures have now opened my eyes!
As I write this, I have received an email from a large CMC which is apparently remodelling its business and the new model will be a “Marketing Co-operative Scheme” where panel members will receive a proportionate number of screened enquiries in relation to their investment. Sounds like a cunning plan but it also sounds very much like one business will send work to another business. The question is… are these models lawful?
To be honest, I have no idea and no-one does because the regulators don’t seem to know either or at least don’t want to show their hand. I don’t quite understand why they have chosen not to give more guidance because what the industry is being faced with is to gamble with business models and hope they are compliant. I know people who have successfully negotiated the ABS application process and they tell me it is gruelling and lengthy. If the regulators are not going to publish the final rules until the New Year how can anyone really submit a model they can be sure will comply?
Aside from the SRA what are the other regulators actually doing? People in the know have whispered that they are doing next to nothing and are waiting for the SRA to show them the way. I can’t imagine the FSA wants to spend too much time dealing with this given the current banking crisis. My guess is that they will nod through any applications from the big insurers who want to form an ABS as the insurance industry is very good at getting what it wants. Another key issue is what will change when insurers start running their ABS? Again, not a lot is my guess as a lot of the insurer’s pet solicitors actually have their staff in the insurer’s office anyway and with some of those arrangements this could be a welcome opportunity for them to formalise matters that perhaps – until now – seemed bit odd.
I read recently that Direct Line “raised £110m over the past three and a half years in referral fees”, so it’s hardly a surprise that it now wants to form an ABS! That’s £110m for setting up its IT system to send FNOL details to solicitors. I hope the programmer negotiated a fee per referral for that piece of code; although his income post April will have to be stopped, unless he forms an ABS where he is not obviously operating a separate business, of course.