MASS MOTOR ACCIDENT

Third Party Capture – Does it really assist the Accident Victim?

John Spencer, Chairman of the Motor Accident Solicitors Society explains the background to Third Party Capture (TPC) and why MASS believes this to be a fallacy.

Over the past 5 years we have seen an increase in Liability Insurers contacting the accident victim direct and attempting to settle their personal injury claim. This practice is known as Third Party Capture (TPC) and one which MASS believes to be unregulated and prejudicial to the claimants right to justice. Liability Insurers however, suggest that TPC is the best way to assist a third party. This article explores the background and the current regulatory position to consider whether the accident victim is in fact protected.

The Access to Justice Act 1997 introduced Conditional Fee Agreements (CFAs). These in turn, particularly with the advent of recoverable ATE premiums and success fees, provided an escape from the Governments obligation to provide Legal Aid in personal injury cases, a point which is, incidentally, not given sufficient weight in Lord Justice Jackson’s recommendations. The introduction of CFAs, led to the birth and proliferation of the Claims Management Company (CMC) service industry. The Liability Insurers response was two-fold; BTE Insurance as a method of third party capture, and third party capture without BTE cover.

The Ministry of Justice (MOJ) set up a Claims Management Regulatory Consultative Group Committee, prior to 2006, to consult upon the need for proper regulation of the CMC industry. Adverse practices had emerged demonstrating the need for a carefully regulated industry. Following consultation, the Compensation Act 2006 was introduced, which provided a regulatory framework and the introduction of an MOJ regulator. Significantly, the Act did not regulate liability insurers as the Financial Services Authority (FSA) claimed to provide regulation of them under the Financial Services and Market Act 2000. They [FSA] argued that the principle of single regulation meant that the 2006 Act would, they claimed, represent double regulation.

Whilst it would be fair to say that the FSA have a significant number of Rules and Guidelines governing how Liability Insurers are to treat their own customers, this is largely based around 11 General Principles of Business, which are fundamental obligations for all Insurers. Whilst these may be adequate for Insurers ‘own’ customers, MASS believes there is a huge regulatory gap when applying to TPC.

Under the Insurance Code of Business Source Book (ICOBS) 2006, paragraph 7.2.2G provided a short paragraph relating to third party claimants. It states that only three of the 11 Principles of Business apply to TPC, namely; Principle 1 – Integrity; Principle 2 - Skill care and diligence and Principle 5 - Market Conduct (which is to be not less favourable to that afforded to a customer) Furthermore, it states that “these rules do not require the insurer to treat the third party as a customer”. When ICOBS was subsequently reviewed in 2007, paragraph 7.2.2G was removed. The FSA asserts that the removal does not represent any change, but simply a move towards general principles based regulation which is a generally applicable policy of the FSA.

MASS would argue that instead of woefully inadequate regulation (or perhaps more accurately, guidelines) for TPC, there is now none at all. That said, it is fair to point out that there are disciplinary sanctions available to the FSA with regard to any general principles breach. However, significantly, to our knowledge, there have been no disciplinary sanctions imposed on any Insurer for breach of the general principles so far as they relate to third party capture.

For the past 2 years, MASS has been challenging the FSA and the MoJ on this regulatory gap and along with other claimant organisations (APIL and the Trade Unions), have provided the FSA with case examples of how insurers have breached the Principles of Business to the detriment of the accident victim. From the responses we have received from the FSA we have had to conclude that there has been insufficient investigation and/or examination. The FSA always want further examples, but when they get them, they appear to fail to take the necessary steps and impose the necessary sanction. One is left with the distinct impression that their requests for further examples and information are a thinly veiled excuse for continued inaction.

What has been done to protect the Accident Victim?
It would appear that the FSA & MOJ see no need for additional rules for insurers when practicing TPC. This in our view is incredible, as given the stringent rules governing Solicitors and the CMC sector, those governing insurers ought to be even stronger and more stringent - the obvious reason being that liability insurers are in direct conflict with the third party, whereas, Solicitors and CMCs are not.

Due to continuing pressure from MASS and other claimant organisations, the FSA late last year published a factsheet “Third Party Capture – What you need to know”. They stated that their exploration revealed only a small proportion of cases were settled directly, that most insurers protected vulnerable parties, and that there was inconclusive compensation data. They also found that some Insurers did not adequately track this activity. They considered that whilst there was no evidence of detriment, there was a risk and therefore warranted further clarification in the form of this factsheet – which incidentally is only guidelines and not rules. The factsheet goes on to offer platitudes in terms of their expectation of their members, being open and fair in their treatment of third parties and fair and adequate in their settlements and to inform third parties of their rights.

In addition, the FSA also produced an information factsheet for consumers with regard to third party capture on the “Moneymadeclear” consumer information website. http://www.moneymadeclear.fsa.gov.uk/news/product/settling_a_claim.html

Supported by the FSA, the ABI has also recently announced that it will introduce a Code of Conduct on TPC. This was supposed to be produced in January, but is now expected to be published in June. It is important to note that this Code is only voluntary and would only apply to ABI members. MASS and other Claimant groups have protested that a voluntary code can hardly be adequate for liability insurers when Solicitors and CMC’s, who act without conflict, are subject to a mandatory rules based framework. This argument has fallen on deaf ears.

MASS suggests that the Website, Factsheet and the Voluntary Code, all represent a totally inadequate framework to protect the accident victim.

The factsheet asserts that the FSA will “take seriously any evidence of impropriety in insurers handling of third party claims” and they will “take action against individual insurers not acting consistently with FSA requirements”. One has to say that these words sound hollow against the facts. To cap it all, the FSA Director of Insurance Sector has informed the Claimant group this year that he does not believe a meeting with them will help! The overwhelming flavour remains one of complacency and inactivity.

What can be done to ensure that Accident Victim is protected?
In order to highlight the need for regulation of TPC, MASS and all the claimant organisations are seeking from their members, fresh evidence which is hard to come by, for two reasons. The vast majority of third party capture claims will be unknown to our members, since the accident victim has no way of knowing whether their claim was properly handled and indeed under-settled. Secondly, the presentation of examples to the FSA, historically, have borne no fruit. There is a very low level of confidence, that the FSA will properly discharge its obligations in investigating thoroughly.

The clearest path for the FSA, if it is serious in its regulatory obligations, is to mirror the Compensation Act requirements for those governed by it. Additionally, it should proactively observe third party capture units within liability insurers operations to see how this practice works on the ground. Their investigation must necessarily involve spot checks, without warning, under their investigatory powers. Were they to do this, our Members experience suggests they would uncover some alarming practices.

However, the overriding requirement is a set of clear rules going at least as far as the Compensation Act, but in addition introducing additional safeguards to take account of the liability insurers conflict with the third party. Secondly, realistic and effective sanctions properly policed by an appropriate regulator, I suggest not the FSA. Thirdly, an absolute requirement and proof that third parties are always advised of the liability insurer conflict and of the availability of independent legal advice on a no win, no fee, basis.

If these three fundamentals cannot be met, then the activity, as a matter of Public Policy, should be banned.

One final question that is perhaps worth considering is whether the issue of third party capture is isolated or does it link in with other key issues? I believe that Referral fees, Third Party Capture and Alternative Business Structures (ABSs) are all inextricably linked when considering justice and protection for the accident victim. It is vital that all of these issues are addressed with regard to each other. For example, Third Party Capture, when combined with ABSs will produce a potentially poisonous outcome which may result in even more profound conflict. Coupled with the Solicitors Regulation Authority (SRA) now converting its Rules based structure for Solicitors to an “outcome focussed regulation”, which is a euphemism of principles based regulation, one has to question whether the future protection of the accident victim is anything but secure.

John Spencer
MASS Chairman