LAPSO has bitten – what now?
As featured in: Legal Futures
By David Johnstone, managing director at PI-Solutions
Living in Scotland and working in both the financial and legal sectors for some years, I’ve been wondering whether the claimant personal injury (PI) sector model in England and Wales could easily follow the Scottish model.
There’s no doubt that LAPSO has started to bite in England and Wales; the economic model has changed, so only the most efficient firms can operate profitably in the sector.
With regards to remuneration per matter, the situation is now not dissimilar to the judicial scale charges structure that has existed in Scotland for decades. While the scale charges in Scotland remained static, the value in personal injury was eroded over a long period of time. When the axe fell on 1 April 2013, the value in England and Wales dramatically reduced overnight and now that LAPSO has started to bite, those firms living off predominately pre-April 2013 work are seeing a reduction in work in progress (WIP) and experiencing a knock-on effect on cash receipts.
The good news is that, so far, we haven’t seen the carnage that was predicted, although the consolidation process will accelerate in 2015.
The outcome for clients and creditors when solicitors bury their heads in the sand, do not face up to the fact their business is running out of cash and do not engage with the SRA, or when such pressures result in client accounts being abused, can be devastating. However, other than the extreme situations, transition or consolidation can be controlled.
If a firm is considering exiting the market, but cannot afford the discounts being applied by the buying firms when buying the whole business, this can cause issues. Problems can also occur when the size of the seller does not justify the buyer taking on the whole business.
In these instances, files can still be transferred in a controlled manner with claimant consent and an exit or restructure achieved in an orderly fashion.
This can even be done on an outsourced basis across numerous other firms and with full value for incumbent WIP achieved if the change is properly managed, as seen last year in the case of Delta Legal stepping back from claimant PI.
Even when it’s left so late in the day that it’s necessary to involve restructuring and business recovery professionals, providing the right professionals are involved in voluntary arrangements, they can be used to buy the time to fully liquidate the asset and avoid the loss of practising certificates, etc. Even seriously insolvent carnage is limited if the situation is managed correctly, as the claimants should be properly taken care of and return to creditors maximised.
The last two years have seen hundreds of firms leaving PI due to natural closure, outsourced run-off, merger, acquisition or failure and the indications are that there’s still a long way to go.
Pre-LASPO, an English or Welsh firm enjoyed average revenue on a successful matter three to four times that paid to a Scottish firm for exactly the same work.
In Scotland, revenue was eroded over the years as a result of the fixed nature of judicial scale charges and the number of claimant PI firms fell. While there was a time when the many firms in Scotland handled claimant personal injury work, today that has fallen to around 20 firms and eight of these firms carry out some 80% of the work. Given that the erosion in value happened overnight, the consolidation of firms operating in personal injury in England and Wales could happen much faster than it did in Scotland.
So here’s my theory. Over the last 25 years, there is an approximate ratio of nine to one in most matters re civil litigation England/Wales to Scotland. This would suggest to me that in the not too distant future, around 70 firms will control 80 per cent of the work in England and Wales, with a further 100 mopping up the balance.
Up to now of course, it is simply a theory and it is clear that there are firms thriving post-LAPSO. The pricing structures are effectively standard now with a 25 per cent deduction from damages, therefore the revenues in England continue to exceed those in Scotland, albeit no longer anywhere near a factor of four.
The fact that there’s just a little more margin in England and Wales suggests two things. Firstly the lake can perhaps cope with a few more rods than the Scottish loch, but even if proportionally double the number of firms continues to operate in claimant PI consolidation still has a way to go. Secondly it will not be lost on liability insurers that they are still paying more for legal services south of the border than they are north and one must remain vigilant as to what further change may be imposed.