Date:

Legal Ombudsman warns of No-Win No-Fee problems ahead

There can be no doubt that 2013 was a year of significant change not only for insurers in terms of claims handling, but also for claimant lawyers who as well as dealing with the same issues were also wrestling with the knock on effects that those changes were having on their business models. As 2014 begins some of the challenges being faced by claimant lawyers have come into sharper focus by the issue this week of the Legal Ombudsman’s report into No Win- No Fee Agreements which may have an important effect on their future use.

The Legal Ombudsman and his report

The remit of the Legal Ombudsman (LeO) is to adjudicate upon complaints from consumers about lawyers and the service given by them, and in this report the LeO looks at the 600 complaints he has had about No Win-No Fee deals in the 12 months leading up to last November. While that number represents 8% of the total number of complaints handled, the LeO sees the area as an important one and recognises that issues from these agreements can have a heavy impact on consumers. In fact, the LeO ordered solicitors to pay redress of almost £1m during those 12 months in No Win-No Fee cases.

The terms of the report and its recommendations highlight the fact that the Jackson reforms are already having a significant effect in putting pressure on No Win-No Fee deals, and the report in fact goes as far as questioning the use of the No Win-No Fee label altogether, even though it is clearly still an important marketing mechanism for claimant lawyers, and they would be deprived of a key tool if at some future stage its use were banned.

Current position with No Win-No Fee

The LeO sees No Win-No Fee deals in stark terms as a model “which consistently overvalues the chances of success and can drive lawyers into unethical practices in order to avoid financial meltdown.” The report refers to cases where it has seen claimant lawyers wrongly trying to pass the risk of a claim onto their client, or going back on the terms of an agreement. It sees an important question to be “What outside pressures are prompting firms to take on cases that have no or very little chance of succeeding, requiring them to resort to exploiting loopholes in the agreements?”

The LeO gives in the report details of a number of cases he has looked at. In one, the claimant’s lawyers withdrew from a claim at the last minute, two weeks before trial, because of the limited prospects of success. The now self-represented claimant went on to win at trial, only for his lawyers who learned of his success to look to recover from him £24k out of his damages for their costs including a success fee, when their retainer entitled them only to payment of disbursements in these circumstances. Unsurprisingly, the LeO criticised the law firm and confirmed they were entitled only to the disbursements, and ordered them to pay a token sum for distress and inconvenience.

The law of the jungle?

The LeO says in the report that he is concerned that the No Win-No Fee market is now increasingly aggressive, with firms competing for cases and prioritising the sourcing of work over the process of selecting the claims. It fears that robust vetting processes for new claims are being sacrificed in favour of a high risk approach involving taking on claims with a low prospect of success. Insurers may not be surprised by this comment from their own recent claims experience.

More regulation ahead?

It may not be surprising that against this type of concerning story, the LeO has referred various cases onto the Solicitors Regulation Authority to consider with a suggestion that the SRA should monitor the use of No Win-No Fee agreements and consider further regulation. The LeO also recommends the use by claimant lawyers of transparent agreements, and is firmly in favour of use of the Law Society’s model CFA.

On advertising, the LeO notes that many firms use national advertising and marketing to generate leads. Looking at the websites of the main claimant operations, the use of the No Win-No Fee slogan remains key, though usually there is a reference to certain terms and conditions applying. The Advertising Standards Authority also has concerns about the use of the “No Win-No Fee” label in cases where consumers can sometimes be liable for undisclosed costs such as ATE premiums. They advise advertisers to ensure that the commitment to any such slogan on the part of the claimant lawyer is genuine.

The Jackson effect

While the report’s remit covers mainly pre-LASPO cases, it recognises the additional impact that the reforms will have. It says that many consumers are not aware in the case of post 1st April retainers that they may have to pay some of their own costs such as success fees out of any damages. The LeO says that it is essential that lawyers explain to the client any circumstances in which they may have to pay costs. It also advises lawyers to be careful before taking on new claims to ensure they are well founded.

Having seen this area as one of concern, the report recognises the need for the LeO to be vigilant as more post LASPO claims pass through the claims process. The LeO says he will continue to watch closely to see what effect the Jackson reforms have on the number of complaints received. We expect a report in a further 12 months to highlight more concerns in this area as post 1 April cases move through to a conclusion and more complaints reach the LeO on the basis that not all of these warnings will be heeded.

Other problems for certain claimant firms

Just before Christmas, the SRA reported that there were 117 law firms which had still been unable to obtain renewal of their PI cover even though we were then well past the 1 October renewal date. Those firms had moved into the Extended Policy Period of 90 days which took them up to 29 December. While they were permitted to continue to handle existing claims up to 29 December, they were not allowed to take on any new cases. Since 29 December, if they have still not been able to secure cover, they should no longer be trading.

Those firms have still not been named by the SRA as yet. In fact, the SRA are not able to say the current number of firms who are now uninsured and who must cease practicing. Some of those firms no longer seem to be happy responding to the SRA’s enquiries. It has got to the stage where the SRA are reported as saying they may contact the landlords of those firms in order to get access to firms’ offices so they can investigate.

Inevitably, there will be a significant proportion of firms within this number which have been processing claims that insurers have had to respond to. This will cause a hiatus in progressing certain claims, alongside the effect on the number of new notifications that may also have been seen by these firms not being allowed to take on new cases over the last three months.

2014

Another year of change lies ahead. The business models used by claimant firms require high claims volumes to be sustained during this year, but there are warnings here that if this is achieved only by taking on poorly vetted claims, the risks for claimant firms are high. Insurers should continue to be ready for the receipt of higher numbers of unmeritorious claims despite the LeO’s warnings. It is now possible that if in the pursuit of higher claims numbers certain claimant lawyers refer to No Win-No Fee when they do not really mean it, then they may at some point lose the opportunity to advertise in that way.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Simon Denyer

Partner

I am the Strategic Legal Development Partner within the Insurance team.

Sectors