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Jack Straw calls for referral fees ban in car insurance**Update 9 Sep 2011: Government bans legal referral fees in car insurance27 June 2011 by Janice May Labour MP and former Justice Minister, Jack Straw, has added his support to the call for a ban on referral fees in car insurance. In an article in the Times, Straw says that too many car insurance companies refer clients to (injury) lawyers 'without permission' in what he describes as 'a racket' in which a referral fee of up to £1,000 can be paid. He also talks of high pressure tactics by claims management companies and legal firms that encourage claimants to pursue cases they would not otherwise pursue, hinting that in many cases claims are speculative or fraudulent. By accepting huge referral fees from lawyers, Straw regards insurance companies as complicit in the processes that lead to ever increasing car insurance premiums and has called on the Government to accept the Jackson Report recommendation that referral fees be banned. Car insurance providers also receive referral fees from credit car hire companies of up to £600 when they refer a client for a courtesy car. Aware of these 'hidden' costs in the car insurance market that inflate costs for consumers, not least because they encourage referrals to uncompetitive service providers, the Transport Select Committee when it looked into the high cost of motor insurance called for greater transparency, recommending that car insurance providers be required to inform consumers of these referral fee payments. They stopped short of recommending a ban on referal fees, just as the current Jackson-related Government white paper includes all of his key recommendations except the banning of referral fees. Although Straw is correct to state that the car insurance industry is complicit in the inflationary effect of referral fees on premiums, they are more their victims than beneficiaries, as they also have to compensate those cases referred to expensive city lawyers and costly credit car hire companies. Most insurance companies, indeed, and their representatives, including the Associaton of British Insurers (ABI) that has been quite vocal on this issue, want a ban on referral fees to help to reduce these added costs. Most injury lawyers agree that referral fees create perverse incentives that distort the market in a way that does not benefit clients and increases costs. The Bar Council has also called for a ban on them, as has the Law Society that has publically criticsed the Legal Services Board for not calling for a ban. There is no doubt that the Government's resistance to a ban on referral fees will lead to the continuation of referral practices that significantly increase costs. Greater transparency, if it occurs, will not eliminate these practices. In fact, much of the money wasted relates to the practices of claims mangement companies and is not due to the behaviour of car insurance providers. Claims management companies provide no primary services that cannot be undertaken by the client hinmself or other agencies, including lawyers, yet their business model is entirely dependent on referral fees and leads to referrals to uncompetitive services that unnecessarily inflate costs for car insurance companies that need to settle these claims, costs that are then passed on to the consumer via higher premiums. The best way to deal with this money wasting is to ban referral fees. The ABI and other stakeholders, including Lord Justice Jackson himself, have strongly urged the Government to complete the task and ban referral fees. However, it would appear that they are not willing to do this, at least at the present time. Jack Straw's intervention is welcome and it won't be the last as politicians hear more and more examples from constituents up and down the country of punitive car insurance premiums, especially for younger drivers. If the Government has well-reasoned arguments for the retention of referrals fees - as we must assume they do - then it is time to put these into the public arena as there is a pressing need for a more public political debate on this issue. The key to find cheap car insurance is to shop around. The price comparison sites (listed top right) are the best resources for this purpose. |
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