With the banning of referral fees set to be introduced in April 2013, the Ministry of Justice is planning to increase application fees and remove the cap on annual fees to ensure resources for proper regulation as CMCs close down. From April 2013 the amount of claims management companies is expected to significantly decrease as a ban on referral fees deals a hefty financial blow to the industry.
Referral fees ban
In an attempt to clean up the industry and reduce dubious activities, last year the Ministry of Justice announced a ban on referral fees to be introduced in April 2013. Referral fees have led to insurance companies profiting by selling on details of potential PI claims to CMCs and law firms. Many motorists were seeing premiums rapidly rise as a result and the overall cost of civil litigation is worryingly high. Referral fees are also perceived at contributing to the number of spurious or fraudulent claims made and contributing to the reality, or consolidating the perception of, a “compensation culture”.
The banning of referral fees is predicted to result in the shutting down of many Claims Management Companies who rely heavily on referrals for their business. A reduction in the amount of CMCs means a direct reduction in the funds available to regulate these kinds of companies which would leave the sector at risk of committing fraudulent practices.
Introducing Higher Fees
For this reason the Ministry of Justice is planning to increase the start-up fees for CMCs by 47% from 2013/2014. The application fee will rise from £950 to £1,400. MoJ have also proposed to remove the cap on annual fees for CMCS which currently stands at £30,000 for companies with contractual relationships with clients. The Law Gazette reports that companies with a turnover of more than £132,653 will pay 0.49% of their turnover in annual fees; companies with a turnover of more than £1m will pay 0.332% and companies with a turnover above £5m will pay 0.24%.
The fees will be introduced in conjunction with new powers awarded to the financial Ombudsman to deal with complaints about CMCs. The shake up to the personal injury sector is intending to improve service for the customer and reduce costs passed on to the consumer in light of the fact that 90% of all consumer complaints now relate to PI and CMCs.