This is how CFAs really work

The excellent Jack of Kent has blogged today on the proposed and recently blocked changes to CFA uplifts in defamation proceedings.

I'm not sure his article really gets to the core of the issue.

The purpose of a Conditional Fee Agreement (CFA) uplift is to compensate the lawyer for not being paid in lost cases by allowing her/him to take higher fees in cases that do win. Back in 1998, Kerry Underwood's book 'No Win, No Fee, No Worries" went through the maths. The idea however is that if a case has say a 75% chance of winning , the lawyer will win 3 out of 4. Thus he needs to take the same in fees across the three cases as he would across four normally funded ones. Mathematically this translates to needing a 33.33% uplift in fees on all cases - three winners then produce 3 x 133.33% of normal fees - which equals 400% of fees across the four cases (including the lost ones). Hey presto - lawyer is no better and no worse off.

Following this maths through, you can see that the curve is an exponential one. To justify a 100% success fee, the case has to be 50/50. (Out of two cases, you win one and lose one, so need 200% of fees on the winner to balance the loser).

What success likelihood does a 10% uplift translate to? The answer is that the lawyer needs to win about 91% of cases to balance the books.

So, to say that "I doubt that even City libel lawyers will be callous enough to turn actually winnable cases down because they will get only 10% windfall instead of a 100% one" as Jack does doesn't really hit the mark. I don't think that lawyers are, or should be seen as, charities, but there is a long and honourable track record of English lawyers taking on work 'pro bono publico' - in other words for free because they think the case deserves it.

The facts are surely that lawyers who would like to represent relatively non-wealthy individuals will struggle to make money on a 10% success fee, and charity is not without bounds. I'd ask Jack a question - if you had to back 100 Simon Singh-type cases, from his point of view, do you think you would be successful in more than 9 of them? Not sure I would. This would leave our Singh-century either paying their lawyer as private clients, or trying to find 100 lawyers competent and persuadable to work for free.

So, the first issue is, how are lawyers able to claim and get 100% success fees in what are felt to be strong cases? You don't just recover the success fee you ask for - it has to be justified as reasonable. Why aren't lawyers - in all fields, instructed to submit their records to independent inspections? If we find that, say, a clinical negligence lawyer runs 100 CFAs past issue (there will be a lot of drop-outs before) at 60% merits, and wins more than 60 (which I'll bet they do) then the merits percentage is wrong, not the system. If this could be regulated and moderated, then we could get to proper risk assessments, rather than the system where 100% success fees are routinely claimed on everything.

The second issue, is that, whilst CFA uplifts are a huge issue, they are just that - uplifts. If the lawyer is charging £500 per hour or more as his basic fees, this contributes just as much to the overspend.

Lord Jacksons recent review of civil costs has a great deal to say on success fees, legal insurance etc, but is strangely silent on lawyers' basic costs. His preliminary report concludes that the average salary of a legal fee earner is around £40,000. This may be right if you include all the paralegals slaving away in personal injury battery operations in the Midlands, but I'd bet that most city partners in 'reputation management' are closer to that sum every month.

Bottom line - whilst lawyers take several hundred pounds an hour, litigation is going to be really expensive for most of us, and if we want to reform things, that should be the place to start.

Jackson's Elephant

The situation in which the law found itself (see last two blogposts) post recoverability caused considerable concern amongst those paying a large number of the bills – and in particular the motor and liability insurers.

Lord Justice Jackson was asked in late 2008 to undertake a review of the Civil Justice system with a view to considering the cost of justice and access to it. His recommendations, published in January are radical. In particular they recommend a removal of the recoverability of success fees and ATE premiums, and (for certain types of action) something called one-way costs shifting (OWCS). The idea of OWCS is that a claimant can bring an action knowing that should she lose the other side will not look to her for costs. This means that no ATE insurance is required for those costs.

Jackson’s recommendations are only that – they will require primary legislation in some areas to enact. There is also an ongoing process (next stage 30th April 2010) to reform costs in low value cases, and how the two sit together has yet to be answered.
Should this all come in to force the effects will be significant. I believe they will be significantly detrimental to far more people than they will help.

If you are a claimant – you face having to contribute something towards your case, although damages will be ‘uplifted’ to help with this. This should force economic accountability – you will go to the lawyer with a cheaper price if you are paying for it. This is good, provided that low price does not mean low standards (think conveyancing here, where a monkey with a typewriter seemed to do my last transaction). What happens however if you now cannot find a lawyer to take on your case. This is most likely to be where cases are relatively low value, or high value and not clear-cut. In both these cases, the solicitor may not get enough reward for the risk of running a CFA. This doesn’t feel like Access to Justice to me.

As a defendant insurer, all seems much clearer – lower costs pretty much guaranteed. But – lower costs will mean lower premiums (good for us) not higher profits; this is a very competitive market and if you don’t pass on the savings, someone else will, and the dreaded meerkat will ensure they get the business.

Big winners will be the areas of the state that have to pay for lots of litigation – in particular the NHS. This means more money (eventually) to spend on proper treatments, and hopefully to spend on getting things right in the first place. BUT – if it spends less because good cases can’t be brought for economic reasons, that’s not so good.

The more I have thought about Jackson, the more my eye has been drawn to a large grey shape sitting in the corner of his lodgings, which seems to escape comment altogether. This is the subject of lawyers’ fees themselves.

Jackson has focussed on ancillary costs but makes little comment on the fact that lawyers hourly rates have outstripped inflation for years in a manner best described as grotesque. The real problem at the heart of costs is the amount lawyers get away with charging. This is Jackson’s ‘elephant in the room’.

I struggle to see how it is right that a partner in a clinical negligence case can charge £400 per hour for his services. Defamation lawyers (should I say allegedly here) charge more, and some City litigators more still.

Now, success fees are obviously a function of basic fees (because its 50% of the base number). It is logical that ATE premiums are also related to them – because the insurer is paying out an amount in lost cases – and if that amount was lower, claims and premiums would be too. (A friend peer-reviewing this comment has pointed out there is probably a fixed amount of administration to do, so the relationship is not linear here – I accept this but there is still a strong correlation.) Yet Jackson has left these fees untouched.

I was given a fine example of another charging issue which I found staggering last week, when I met with a regional commercial lawyer. His charge-out rate was I think £350 per hour in a case where he was suing a large company represented by a ‘Magic Circle’ law firm. A mediation meeting was scheduled, where he turned up with his client, to be met with the opponent and SIX lawyers, from partner down. The partner’s fee was around £650 per hour, and the six together were taking nearly £2,500 per hour! Not only was the rate high (not that I see £350 as cheap) but the legal resources deployed, and the cost of them, were staggering.

So, dear reader, what do you think? Do lawyers deserve those sort of fees, compared perhaps to an NHS consultant? We hear a lot about ‘fat cat’ bankers, but not so much on ‘fat cat’ lawyers. Time for a change?

Next time - so if it is broke - how else could we fix it?

History II - recoverability to Jackson

Last week, I looked briefly at the Legal Aid system, and the efforts to replace it that led to the Conditional Fee Agreement.

The 1999 Access to Justice Act led to the next big change. Until this point any claimant in certain types of action could take out a CFA and ATE insurance (see last posting for definitions) but would have to bear the costs of these themselves. From April 2000, these additional charges fell to be paid by the other party if the claimant won her case.

So, think through the logic of this for the moment. As a defendant, who happens to be faced by a claimant using CFA / ATE insurance, you know that if you lose the case you will have to pay damages, ‘normal’ lawyer’s fees, a success fee which could be the same as the fees again, and an ATE premium. As a claimant however, you can bring your case at no cost – win or lose.

This is a pretty significant change in the legal model. Before CFAs it was pretty common ground that you never recovered al your costs in a won action – so as claimant, you always had some (as Americans and business school graduates seem to charmingly refer to it) ‘skin in the game’. Now defendants see immediate increased costs, and claimants get a free shot. Or, from a claimant perspective, a wronged individual gets her entitlement and the wrongdoer absorbs all the costs.

To say that this found favour with claimants and their lawyers would be an understatement. If a personal injury lawyer wishes to compete in the normal market space then ‘no cost’ law has to be a guarantee. Any lawyer who can set success fees successfully should at least balance the books from them. Defendants have the view that claimant lawyers do rather better than this – if one were to select only the strongest cases and use all sorts of reasons to justify why they might lose – it is possible to run a book of cases which you assess as being marginally better than 50/50, but where you actually win 80%.

Where it gets really bizarre though is if you think like an economist about it. What controls prices in a market? Well, we all usually look for value for money. This doesn’t mean we all buy the cheapest – the free market has allowed Waitrose to flourish at the same time as Lidl does. It does however mean that we try and shop around, and feel that what we are paying for makes sense to us. This means that for commodity products – where the features are pretty much standard – priced tends to be the deciding factor. If you want further evidence of this theory, think about the insurance on your car. I accept that if you drive a Bentley or an import you might need to go to a specialist, but for most of us, we are encouraged to use the services pimped by a stereotypical Italian tenor, or a Russian meerkat. These scour the market for quotes and did, I must admit, save me a packet (though I’ve never felt the same about Meerkat Manor since).

So back to law – here we have products (CFA and ATE) which the buyer will NEVER pay for! Lose and they are free – win and the other side pays. How much competitive pressure is there on the pricing of these products? About the same as the concentration of active ingredients in a 30C homeopathic arnica. The only check on these sums is what the courts and the CPR will allow you to recover.

This is an unusual market model. There is clearly competition, so it’s not a monopoly which sets its own price. Equally, it is not a cartel – no-one suggests the purveyors of these products are getting together and fixing prices – apart from anything else they don’t need to because the buyer is told – ‘you won’t ever have to pay it’. It feels to me closer to the economics of a basic utility post-privatisation. The reasons for the market structure are different, but there is no supply and demand check on prices in either – if Thames Water is expensive – I can’t go elsewhere.

Utilities get round this by having a regulator who caps prices – Ofwat etc. Whilst this was aired for ATE particularly, it never happened.

And now along comes Jackson. My next blog will look at what he’s trying to do, where it will work, and where it won’t, and the rather large elephant in the corner of his study.