Changes to the Solicitor's Referral Code have seen many new claims management companies crop up, but solicitors should be wary of unregulated companies if they want to avoid disciplinary action

In the past 10 years there has been a revolution in the way in which litigation, particularly personal injury litigation, is conducted. Only 10 years ago the Access to Justice Act allowed solicitors to act on a 'no win, no fee' basis. Solicitors were then allowed to advertise for business. Finally there was a change in the Solicitors' Referral Code, allowing solicitors to pay referral fees.

In tandem with these changes, there has been a huge rise in claims management companies that act as intermediaries between the general public and law firms. Many law firms use claims management companies as quasi marketing companies, seeing the payment of a referral fee as a marketing expense.

However, there are many pitfalls for the unwary, both from a professional and regulatory viewpoint. Since the Compensation Act 2006 was brought in, claims management companies have been regulated. Although it may sound obvious, it is important for solicitors to ensure that they are only dealing with claims management companies that are regulated. Solicitors may face fines or disciplinary action if they do not.

Solicitors need to ensure that the companies with whom they contract comply with the Solicitor's Code of Conduct. Default could lead to disciplinary action and a fine. Although this sounds obvious, when the SRA carried out a survey into 149 referral arrangements at the end of 2007 it found that in 48% of cases solicitors had not extracted an undertaking from the company that they complied with the conduct code.

Solicitors should also make sure that clients are given relevant information relating to any commission. Rule 2.06 of the Code of Conduct states: "If you are a Principal in a firm you must ensure that your firm pays to your client commission received over £20 unless the client, having been told the amount, or the precise amount is not known, an approximate amount or how the amount is to be calculated, has agreed that your firm may keep it". The SRA survey found that 48% of firms did not comply with this rule.

It is important to keep track of advice given by the SRA in relation to claims management companies. Earlier this year, concern was raised about a minority of claims management companies that were making claims that they could assist people in wiping out their debts and complaints raised about misleading marketing. In February 2009 the SRA warned that solicitors would be vulnerable to disciplinary action if they purchased consumer credit claims from claims managers. As of April, 10 firms were being investigated in this regard.

Many arrangements mean that solicitors are tied into an agreement with one insurer for the provision of after-the-event insurance. Important questions are whether this breaches the Code of Conduct, and would it affect the quality of advice being given by the solicitor? The Court of Appeal looked at the questions in the Accident Line Protect test cases. From that case it can be gleaned that:

• membership of a panel in itself does not necessarily amount to an interest;
• exclusivity would also not necessarily in itself amount to an interest;
• one has to look at the circumstances to see if a conflict was created. In this case the revenue created from the insurers amounted to between 0.15% and 4.57% of the firms' turnover. That was not seen as being significant; and
• even if an interest were to be found, it is not the end of the matter. One would need to go on to explore the nature of the interest but a solicitor would be under an obligation to advise his client as to the benefits he would derive from membership of that scheme.

A solicitor must also be satisfied that he is acting in the best interests of the client and in accordance with Rule 1 of the Code of Conduct. A case which recently came before the Solicitors Disciplinary Tribunal (SDT) is illustrative of what can go wrong in these relationships. Mr Tilbury worked with a claims management company called Justice Direct. As part of the relationship, the client paid 25% of his damages to Justice Direct. The SDT found that no competent solicitor could recommend agreement to this arrangement to his client. They also felt that the arrangement limited a client's freedom of choice and also created a conflict of interest. Mr Tilbury was fined £5,000 and was ordered to pay costs of £15,000.

Therefore, the message for solicitors is that any contract with a claims management company, and particularly one with an attached insurance product, needs proper risk management and an assessment made that the firm is satisfied that it is not breaching the Code of Conduct.

Nichola Evans is a partner in the business and professional risk department at Browne Jacobsen.