Nearly a fifth of the North West’s specialist personal injury law firms are considering shutting up shop due to the financial impact of the Government's sector reforms coming into force this spring.
This alarming statistic is one of a number of surprising findings from a survey of over 300 North West law firm managing partners conducted on behalf of sector specialist law firm O’Connors LLP.
Government reforms will impose a ban on lawyers paying third parties to refer personal injury claimants to them. 62% of the firms surveyed currently pay referral fees. Over 68% say they intend to continue doing business with these referrers after the reforms come into force and are in discussions with them to find the best way to structure their relationship going forward.
According to the survey, conducted last week, 71% of managing partners are actively trying to re-structure arrangements so that cases are self-referred by potential claimants on the recommendation of the referrer in the hope that this will avoid the ban. 53% were planning to increase their own direct marketing spend to attract new clients, rather than buying them in. According to earlier research, the net cost is about the same.
The pressure on the sector has been compounded by the reduction in Road Traffic Accident (RTA) portal fixed fee rates and a planned extension to the portal being introduced by the Government in the next few months. Over 91% of the firms surveyed handle portal work and virtually all of them believe that the planned changes will reduce the profitability of their personal injury divisions. Over a quarter of them believe profitability will drop by 50% with one in ten believing it will drop by as much as 80%.
Faced with the prospect of a major downturn in case volumes and profitability, 19% of the managing partners responding to the survey say they are considering ceasing to trade altogether and effectively going into run-off.
Firms believe the impact of the proposed changes to extend the RTA portal to include Employers Liability (EL) and Public Liability (PL) cases will have a broadly similar impact on the profitability of this type of work though a slightly higher percentage felt it would have no impact.
The anticipated fall in firm profitability is impacting managing partners’ plans for structuring their businesses to accommodate the recent rule changes allowing non-lawyer ownership of law firms. 23% say they no longer intend to bring their work referrers into their proposed Alternative Business Structures.
There is a growing trend for law firm managing partners to seek external advice on regulatory issues and on the structuring their firms and relationships with third parties. None of the respondents said they would be likely to ask their bank manager for help and only 24% would be likely to approach the SRA themselves. Consultants and specialist law firms are the most favoured sources of help with 43% of managing partners likely to approach a consultant and 48% likely to seek the help of a specialist law firm.
As if to add insult to (personal) injury, an overwhelming 85% of respondents believe the annual cost of regulatory compliance is increasing.
Commenting of the survey results, O’Connors' partner Nigel Wallis said: "This survey shows the high level of stress on this important sector of the legal economy which employs tens of thousands of people in the North West and provides access to justice to many thousands of accident victims every year. We are working with many of these law firms helping them to find a way forward and, sadly, the findings support the stories we hear from managing partners almost on a daily basis."