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Is the ban on referral fees great news for consumers?

The Ministry of Justice has announced today that referral fees will be banned as part of the Government's commitment to curb a perceived compensation culture and to tackle rising insurance costs. Sounds like great news for consumers but will it lead to a reduction in insurance premiums and lead to a reduction in insurance costs?

In brief the answer is no. Firstly insurers do not have to pay referral fees. Despite the myth that referral fees are in some way charged by solicitors to insurers at the conclusion of a successful case this does not happen as referral fees are not recoverable when a successful compensation claim is made. The reality is that the costs paid by an insurer when a successful claim has been made have absolutely nothing to do with any referral fee.

Fixed fees, for instance, were introduced for low value road traffic accident claims in 2003. With these claims, which constitute the vast majority of personal injury claims made, a fixed fee is paid at the conclusion of a successful claim. The fixed fee is paid and is exactly the same regardless of whether the solicitor has paid a referral fee or not. The Ministry of Justice and the Government are wrong if they believe that banning referral fees will somehow save insurance companies money and that they will then pass on any savings to consumers.

The other myth is that insurers will pass on any reduction in costs to consumers. Everyone who owns a car will know how much insurance premiums have gone up over the last year with some estimates that the average price increase has been around 30%. The justification for such high premiums according to insurers is because of an increase in the number of people making compensation claims, which they say has been spiralling out of control.

Insurers will state they have had to increase their premiums just to stand still and pay for the rising cost of compensation claims which meant they have had to pass on the increased costs to motorists. This view seems to be shared by the Ministry of Justice. When announcing the decision to ban referral fees they stated " Insurance companies inevitably pass the costs they incur through increased compensation claims directly onto motorists and those with other insurance policies, unnecessarily forcing up the cost of living.

Details have however started to emerge this week of insurance companies' profits. It is clear that insurance companies are reporting hugely increased profits for this year. The significant increase in premiums over the last year was therefore not justified and it appears that insurance companies have simply taken an opportunity to take the increased premiums being charged to consumers as pure profit. If this is not correct, let's see if insurance companies will stand up and reduce their premiums to reflect the massive increase in profits this year¦all I can say is don't hold your breath on this one, as its not going to happen.

Consumers are not stupid. They can see how certain industries, such as insurance companies, along with energy companies make huge profits, consistently put up prices and fail to pass on any savings to the consumer. It is about time the Government pays more attention to these practises and holds insurance companies to account for the huge increase in premiums which are completely unjustified.

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