The end of ‘no win, no fee’ lawsuits could be the outcome of the new Legal Aid, Sentencing & Punishment of Offenders Act when it is introduced on 1st April 2013.
The Act changes the way in which these ‘conditional fee arrangement’ cases are funded, resulting in the success fee being capped at 25% of the damages awarded.
This fee cap replaces current rules where the fee can be up to 100% of the legal fees involved in the case. It is likely to mean that only cases with prospective damages of at least £100,000 (and a good chance of winning) will be pursued by solicitors on a ‘no win, no fee’ basis.
Few of us will mourn the end of ambulance chasers, their often annoying marketing techniques and the ‘compensation culture’ they are thought to have created.
It does raise an interesting comparison between legal services and retail financial services.
Since the introduction of the Retail Distribution Review on 31st December, financial advisers have been unable to receive any commission for recommending an investment product.
This rule change has not however resulted in fees being charged for advice.
Instead, many financial advisers still choose to operate on a contingent fee basis, where they only charge fees if they successfully sell a financial product to their client.
This charging basis naturally introduces bias to the advice process.
Even independent financial advisers can work on this contingent fee basis, only getting paid if they recommend a product from which they can deduct an adviser charge.
There are many (many) situations where doing nothing is the best course of advice. Where no fee is charged for advice, doing nothing and confirming the suitability of existing arrangements is rarely going to be the advice outcome.
Assuming impartiality is maintained, contingent fee models like this create a great deal of cross-subsidy; those investors who are convinced to buy a financial product are paying for the advice of those they did not.
Rules that will hopefully bring about the end of ambulance chasers could also apply in the world of retail financial services.
Once the Financial Conduct Authority (FCA) completes its first review of how well the Retail Distribution Review is going, we expect to see contingent fee models become the focus of their attention.
If your financial adviser is only charging you a fee when you buy an investment product, they are effectively still receiving commission, albeit a marginally cleaner version than before.
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