Written evidence from the Ministry of Justice

1. The Government is committed to reducing financial burdens on consumers. These new reforms build on previous reforms to reduce the costs of civil litigation. The volume of RTA related whiplash claims remain at historically high levels, and the cost to all motorists from the continuing high number of ‘straightforward’ whiplash claims is too great. This is despite a decrease in the number of reported road traffic accidents and significant improvements in vehicle safety. It is therefore right that further action is taken now by the Government to reduce the financial burden on consumers.

Definition of whiplash and the prevalence of RTA-related whiplash claims

2. In part one of the Government’s response to consultation[1] we stressed the need to be clear which group of claims will be affected by these measures. Developing an accurate and effective definition was an important element of the consultation process.
3. The Government in its consultation document[2] proposed initially that the definition of the cases that should be covered by these reforms should be aligned to the definition used for the MedCo Portal, which can be found in paragraph 1.1 (16) of the Pre-Action Protocol for Low Value Personal Injury Claims in Road Traffic Accidents. This definition is as follows:

‘... a soft tissue injury claim’ means a claim brought by an occupant of a motor vehicle where the significant physical injury caused is a soft tissue injury and includes claims where there is a minor psychological injury secondary in significance to the physical injury’.

4. The majority of respondents to the consultation, drawn largely from the claimant sector, disagreed with the proposed definition, arguing that it was either too broad and/or too vague to be effective in relation to these reforms. A large number of respondents noted that the title of the consultation focused on whiplash claims, recognising that such injuries are largely related to damage to the neck and/or upper torso. The MedCo definition includes any soft tissue injury suffered as a result of an RTA, for example damage to ligaments or tendons in other parts of the body and/or skin lacerations or bruising in other parts of the body.
5. Some respondents, mainly from the insurance sector, were supportive of the MedCo definition arguing that it had been effective for MedCo medical reports and that a harmonised definition would make sense.
6. In developing the draft clauses on the definition of whiplash in the Prisons and Courts Bill, the Government considered the claims it was looking to tackle as well as the views of respondents to the consultation. The overarching definition in primary legislation will be supported by regulations made via the affirmative procedure for secondary legislation. The Government is working with a number of experts from across the industry, including medical experts, to inform the drafting of these regulations which will be published as appropriate during the passage of the Bill through Parliament.
7. One of the issues that was highlighted as part of the consultation exercise is that of the ‘labelling’ of whiplash claims in the data gathered on RTAs. Many respondents from the claimant lawyer community have indicated their belief that the numbers of whiplash claims registered with the DWP’s compensation recovery unit (CRU) are decreasing. However, further study of the CRU statistics suggests this is not the case and that differences in claims labelling may be behind this belief. When soft tissue injury claims labelled as ‘neck’ and ‘back’ are considered together with those labelled as ‘whiplash’ the figure increases significantly. The number of such claims has remained steady over the last three years at around 690,000 claims, which is around 90% of all RTA related personal injury claims made.

Whether or not fraudulent whiplash claims represent a significant problem, and if so, whether the proposed reforms will tackle this effectively

8. The Government agrees that combatting fraud is important, and of course last year the Government accepted the recommendations of the Insurance Fraud Taskforce aimed at tackling fraud[3]. The new measures to prohibit pre-medical offers and to increase the small claims limit will act to deter fraudulent behaviour. The ban on making offers to settle without medical evidence will ensure that insurers can no longer choose to settle claims for financial reasons without verification that the claim is genuine.  The increase in the small claims limit will reduce the costs associated with civil litigation, encouraging greater challenge to potentially fraudulent claims. The potential expense of doing this is often given as a reason why some insurers settle without challenge.
9. This reform programme is, however, about more than dealing with fraudulent and exaggerated claims. The cost to all motorists from the continuing high number and cost of these ‘straightforward’ claims is too great, and it is right that the Government takes firm action to reduce the financial burdens on consumers. At the moment there is simply too great a financial incentive to make such claims. The average payment for a minor whiplash claim is £1,850, and the cost of dealing with them is out of all proportion to any genuine injury suffered.
10. In particular, there appears to be a systemic problem regarding the group of claimants who claim for injuries of less than 6 months’ duration. There is a strong disincentive for insurers to devote time and energy to contesting these claims, given the sums involved in an individual claim, along with a corresponding incentive for claimants to exaggerate the extent of their injuries – particularly if no medical report is required from the outset.
11. These measures are aimed squarely at tackling this compensation culture which has grown up around low value whiplash claims in recent years. This culture is fuelled by a substantial industry which encourages motorists to make claims even when little or no injury has been suffered. These reforms will tackle this wider culture where it has become socially acceptable to make unmeritorious claims.

The provisions in Part 5 of the Bill introducing a tariff to regulate damages for RTA-related whiplash claims, with an uplift in exceptional circumstances and banning the settlement of claims without medical evidence

12. The introduction of a tariff of predictable damages for RTA- related whiplash claims, alongside a ban on offering to settle such claims without medical evidence, is an appropriate response to the issues identified by the Government.
13. The introduction of such a tariff is not a new idea. It was recommended by Lord Justice Jackson for consideration in his 2010 report ‘Review of Civil Litigation Costs: Final Report[4]’. It also features as a recommendation in the Insurance Fraud Task Force report, which was published in January 2016. In addition, many European jurisdictions have low value personal injury compensation schemes which feature tariff systems. For example, such a scheme featuring a tariff, backed by judicial uplifts in exceptional circumstances, has been successfully implemented in Italy.
14. A tariff system provides certainty to both parties as to the value of the claim and a clear and simple system of fair compensation for pain, suffering and loss of amenity along with a fair balance against the interest of consumers paying motor insurance.
15. As the consultation response document makes clear, there were differing views from respondents on the proposed levels of the tariff. The document includes a revised tariff which responds to the view that the bracket of 0-6 months injury duration should be broken down into two bands and that the figures for all parts of the tariff should be uplifted to account for additional uplift in the 13th edition of the Judicial college Guidelines. The proposed tariff will cover compensation for whiplash injuries which also encompass a minor psychological element.
16. The Government also consulted on the question whether there should be a judicial uplift which could be applied to the tariff amount in exceptional circumstances. Respondents provided good arguments for and against including an uplift. The Government decided on balance that it was appropriate to include such an uplift, and that what may be considered exceptional circumstances should be for the courts to determine.
17. The use of pre-medical offers to settle claims can encourage minor or even fraudulent claims to be made which adds to the perception that whiplash claims represent ‘easy money’. In addition, they can also disadvantage genuinely injured claimants, who can accept compensation offers without knowing the full extent of their injuries. The scope of the Government ban will be limited to RTA related whiplash claims as these are the claims the Government is most concerned about. The proposed clauses included in the Prisons and Courts Bill to ban the settling of whiplash claims without medical evidence are broadly supported across the industry. The regulatory ban is to be enforced by the relevant regulators.

The impact of raising the small claims limit to £5,000 for RTA-related whiplash claims, and of raising the small claims limit to £2,000 for personal injury claims more generally, taking account of the planned move towards online court procedures

18. The Government consulted on whether the small claims limit should be increased for RTA related claims or should apply to all personal injury claims. Having considered the views and feedback of respondents the Government decided to increase the small claims limit to £5,000 for RTA cases but to restrict the increase for other types of claim to £2,000.
19. The small claims track is designed to be uncomplicated and can be used by litigants in person. The Government is of the view that low value personal injury claims, for example whiplash claims, are not so complicated as to routinely require legal representation. Genuinely injured claimants are not, and will not in future, be precluded from having legal representation in the small claims track, but will need to decide whether to represent themselves, pay for a lawyer or seek some other form of help or representation.
20. The Government is committed to ensuring that the appropriate supporting structures are put in place to facilitate this reform, and is working with stakeholders to tackle both the legal and the technical challenges in taking the reform forward. For example, an expert working group will look at what revisions are needed to enable litigants in person to pursue a claim, and another will work on ensuring the relevant IT portals (Claims Portal and MedCo) are fully accessible. The Government will continue to engage with the relevant stakeholders such as MedCo, Claims Portal Limited and the judiciary along with experts from both the claimant and defendant sectors to ensure the successful implementation of this policy.
21. It is not the Government’s intention to move the majority of whiplash claims which are currently in the Fast Track pre-action process straight to the small claims court. The pre-action protocol and the Claims Portal which serves it are an important part of the process and it is important to retain the advantages they bring to the system. The Government will therefore be working with stakeholders to consider what necessary changes are required to the system.

Government position on claims management regulation and cold calling

22. The Government is clear that it will tackle   unscrupulous behaviour from all parts of the personal injury sector, including by claimant lawyers and insurers as well as CMCs.  The Government’s whiplash reform programme will tackle the incentives for a number of these bad behaviours through the introduction of the new tariff and by the banning of the practice of settling whiplash claims without medical evidence. In terms of CMCs and their Regulation, the Government has already taken a number of steps to strengthen the regulatory regime for CMCs, and further action is planned. 
23. The MoJ Claims Management Regulator is actively working with the Information Commissioner’s Office and other regulators to both take firm enforcement action against those CMCs who engage in unlawful unsolicited marketing, and to tackle illegal activity where it is identified.  In addition, the Government has also accepted the recommendations in Carol Brady’s Independent Review of Claims Management Regulation and plans to introduce an even tougher regulatory regime for CMCs through transferring responsibility for claims management regulation to the Financial Conduct Authority (FCA); re-authorising all CMCs under a new FCA devised process; and holding managers of CMCs more directly accountable for the actions of their businesses via a FCA senior managers regime
24. Work is underway to establish the best way to transfer responsibility for CMC regulation to the FCA and to implement the recommendations made in the Brady Report.   Annex A attached to this note provides further information on the role of CMCs and the existing regulation of the claims management sector.

13 April 2017

Annex A

Claims Management Companies (CMCs) in the personal injury claims sector

1.       The Ministry of Justice is responsible for regulating the provision of claims management services (mainly the activities of CMCs) in England and Wales under the Compensation Act 2006.  This function is managed by Claims Management Regulation Unit (CMRU). The two largest claims sectors are personal injury (PI) and financial miss-selling claims. 

CMC PI market key facts

2.       In January 2012 there were more than 2,500 authorised CMCs operating in the PI sector – this has reduced to fewer than 800 today. The number of authorised PI CMCs more than halved after the implementation of the referral fee ban in April 2013.  Total reported CMC annual turnover in the PI sector peaked in 2012 at £653m. By 2015 this had reduced to £215m. Provisional reports for 2016 indicate a continuation of the trend with a reduction to around £184m. This is set out in the chart.

3.       The PI claims market is dominated by a small number of large CMCs who operate on a national basis, with the majority of CMCs being smaller locally operated entities which typically work with a local solicitor.  The PI industry is geographically concentrated along the M62 corridor (North West & Yorkshire) with 38% of CMCs based across that region and a large proportion of PI solicitors also based in the North West.

CMCs and solicitors

4.       Many claimant solicitors base their business models on the use of CMCs for advertising and claims generation purposes. Since the referral fee ban was introduced there has been a shift in business practices.  Many CMCs and solicitors have amended their business relationships to comply with the terms of the legislation.

5.       The business models used today include pooled marketing schemes where solicitors pay typically larger CMCs to obtain claims for them through advertising, ‘recommendation’ models where the solicitor pays the CMC a fee when a client instructs them after being recommended by a CMC] and service agreements where solicitors pay CMCs for providing certain permitted claims handling services.

CMC compliance issues

6.       The CMRU has identified and is seeking to tackle, with partner organisations as appropriate, a range of non-compliant behaviours by some CMCs. The Solicitors Regulation Authority (SRA) and Information Commissioners Office (ICO) are the primary partner regulators given that virtually all PI cases will ultimately be handled by a solicitor and much of the misconduct arises from the use of data and direct marketing methods.  These include:

• Telephone marketing – persistent calls purportedly about an accident often encouraging the consumer to proceed by claiming money has been set aside for them and coaching as to symptoms likely to have been suffered.
• Data – no or insufficient due diligence on data carried out by CMCs including relying on third party assurances that the data is ‘opted in’. Solicitors are subsequently placed in breach of their rules by this practice as they are prohibited from acquiring clients via unsolicited contact.
• Referral fee ban – although compliant models have emerged some CMCs have failed to maintain compliant operations in practice
• Data acquisition – intelligence suggesting data is being illegally sourced from some insurers and repair centres with staff stealing and selling data as well as reports of access via more sophisticated methods.
• Insurance fraud – individuals previously involved in CMCs are often accused and convicted of insurance fraud including inducing or staging accidents, placing ‘ghost’ passengers in vehicles involved in accidents and other associated fraudulent activity such as inflating repair and hire car charges.
• Organised crime – individuals running PI CMCs are also sometimes part of wider criminal networks and organised crime gangs suspected to be involved in money laundering and other crimes.

Direct marketing

7.       CMCs are already banned from introducing claims, or details of potential claims, to solicitors if these have been obtained by an unsolicited approach by telephone or in person.  The majority of unsolicited calls for PI claims appear to be made by illegal unregulated businesses. There is evidence of new ways of marketing. For example, some CMCs using the services of other businesses outside the EU for direct marketing (with data operations based as far afield as South America) and there are reports of a small number of businesses using Skype text and voicemail as a form of marketing.

8.       The ICO published ‘threat assessment data’ for February 2017 shows that accident claims (vehicle damage and/or PI) is the most reported topic in the live calls category (1,381 complaints), although this is reduced from October 2016 when 1,988 reports were made. It is thought that the reduction is due to a number of factors including enforcement action, consumer awareness and call blocking equipment. The identification of the businesses behind nuisance calls continues to be difficult, for example because the majority of call line identifications shown on phones are spoofed.

9.       The government recently transferred ownership of the Telephone Preference Service from Ofcom to the ICO and, subject to passage of the Digital Economy Bill, individual company directors will later this year be made liable for fines making nuisance calls if in breach of Privacy and Electronic Communications Regulations.

Enforcement

10.   The steps taken by the CMRU to tackle CMC personal injury misconduct, includes:

• increased financial penalties – since the start of 2015, the CMRU has fined six CMCs operating in the personal injury sector over £1.5million for unlawful unsolicited marketing;
• carrying out over 100 audits and issuing over 40 warnings for direct marketing breaches between 2015 and 2017; and
• working with the SRA and ICO to share intelligence, investigate and take enforcement action as appropriate against CMCs who illegally purchase data/leads or claims arising from unsolicited calls and text messages.

Reforms to improve regulation of CMCs

11.   The CMRU has implemented a range of regulatory reforms over last three years, including: banning verbal contracts and the offering of cash incentives or gifts to people who bring them claims; introducing stricter requirements for CMCs to substantiate claims; placing a stronger requirement on CMCs to make sure any leads CMCs receive through telemarketing are legally obtained; and implementing the power to impose financial penalties on CMCs referred to above.

12.   Following Carol Brady’s review of claims management regulation, the Government announced in 2016 that it intended to establish a tougher regulatory regime for CMCs by transferring responsibility for regulation to the Financial Conduct Authority (FCA); re-authorising all CMCs under a new process; and holding managers of CMCs personally accountable for the actions of their businesses via a new senior managers regime.

13.   Work is underway to deliver the legislative and organisational changes needed to transfer responsibility for CMC regulation to the FCA. The timeline for transfer is expected to be 18 - 24 months from when the required primary legislation is introduced.