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.
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