Legal Aid

HL Deb 09 March 1998 vol 587 cc80-98

7.30 p.m.

Lord Thomas of Gresford rose to ask Her Majesty's Government whether they will postpone their present proposals to abolish legal aid in money recovery claims, in the light of the Bar Council's report of January 1998, Access to Justice: A Fair Way Forward, until the fullest investigation and research have been completed on the outcome of current conditional fee agreements and their associated problems of insurance, risk assessment, uplift and disbursements.

The noble Lord said: My Lords, I express my thanks to the noble and learned Lord the Lord Chancellor for taking the trouble to come here this evening to answer the Question that stands in my name. I have an interest to declare in that for—I am shocked to think—upwards of 40 years I have worked with legal aid support both as a solicitor and at the Bar. In relation to this Question I consulted with the major players of both the Law Society and the Bar Council, but I emphasise that I am not seeking to express a union view in anything I may say in addressing your Lordships this evening.

I urged the Lord Chancellor, "Festina lente", in my speech on 9th December in relation to his proposals. I was pleased to hear therefore that a more considered approach had prevailed in his Statement of last week and I hope that he will not be too irritated if I continue to murmur "lente, lente". We are all at one in wanting to increase access to justice. It is important that we achieve the right solution.

The fundamental issue that must be addressed in the consideration of legal aid is the spread of risk, particularly in personal injury cases. Risk is not easy to assess, even at the door of the court. I have what is called a "10 o'clock rule": that is, at 10 o'clock on the morning of the hearing I shall hear from somewhere—either my client or the opposition—that something has gone wrong and my assessment of the chances of success therefore has been considerably influenced.

The consultation paper in paragraph 3.4 is right to describe a legal aid certificate as providing support from an almost inexhaustible fund and almost total protection from any liability to pay the opponent's costs if the assisted person loses the case. But we should put that statement into its proper context. In road traffic cases insurance companies, either directly or through the Motor Insurers Bureau, are supported by premiums compulsorily paid by car owners. In cases of injury caused by negligence, at work or by professional negligence, there is compulsory insurance either by statute or by the rules of the professional body concerned. In all but a minute number of personal injury cases, therefore, the defendants are backed by insurance which is paid for ultimately by the ordinary citizen as a consumer of goods or services or as a road user.

Legal aid has been provided by the taxes of ordinary citizens for some 50 years to those who cannot afford to go to law. The one counterbalances the other. As a matter of policy, it was determined that the legal costs for unsuccessful litigants should be paid by the ordinary citizen as the consumer rather than as a taxpayer. In other words, insurance companies stand the loss but it is not money that they can manufacture; it comes from people who have paid premiums. The legal costs which the insurer has to pay are a factor in determining the premiums that he charges and upon which he sets out to make a significant profit.

It is now said that it is unfair to insurance companies that they should not be able to recover their own costs from an unsuccessful plaintiff. Nobody feels particularly sorry for insurance companies in a situation like that. But the balance is changing. I was encouraged to note in the consultation paper a suggestion, but no more than a suggestion, that the success fee and any insurance premium under a conditional fee agreement might be recoverable against the losing party. The Government therefore have in mind the possibility that, even with the proposals that they are now putting forward, the insurers should continue to pay disbursements and additional costs that the winning party has incurred.

I find it bizarre that a Labour Government should set out to increase the profits of insurers by relieving them of their liability for costs. It is strange that a Labour Government should take away from less wealthy people; that is, the 40 per cent. of the population who, if they are successful, have, by definition, suffered personal injuries as a result of the negligence of the defendant; that they should contemplate the removal of a proportion of their damages by success fees up to 25 per cent. of the amount they recover by voluntary agreement.

The damages that an injured plaintiff receives will have been carefully calculated by the court to compensate that injured person for his pain and suffering, loss of amenity and financial losses. It seems odd that, instead of receiving the whole of the money through the use of legal aid as at present, it should now be contemplated that he loses a significant proportion of it. And not only that; but that he should also lose by paying a premium to another insurance company in order to cover the risk of his losing.

Conditional fee agreements may have their place for those whose incomes are above the legal aid level. They have been in operation for a very short time—since 1995—and when they were introduced by the then Lord Chancellor, the noble and learned Lord, Lord Mackay of Clashfern, he said that there was no question at that time of legal aid being replaced in whole or in part by conditional fees; they were, an additional provision over and above legal aid".—[Official Report, 5/2/90: col. 558.]

It is only two or three years ago, but the Labour Party was not enthusiastic. In its policy paper, Access to Justice, published in October 1995, the Labour Party said, We regard conditional fees as an experiment to be monitored closely, and in the light of the Scottish experience, do not expect their introduction to make a significant improvement to access to justice. They are at present, little more than a gimmick, designed to mask the chaotic state of the legal aid scheme and the court service".

Now the "gimmick" has become the main way in which this Government propose to finance litigation on behalf of people who are lacking in funds.

The policy document referred to "monitoring". The charge I make against the Government is that they have not monitored the experiment at all. The Policy Studies Unit is the only body to produce an assessment—in September 1997—of the way in which conditional fee agreements have worked. It looked at 60 lawyers who had dealt with 197 cases. The Policy Studies Unit called over and over again in its report for "further research" on the effect of non-specialist firms and the monitoring and investigation of solicitors' methods of risk assessment. It called for the gathering of more information, for the following-up of calculations of the uplift of fees and for more evidence into the effect upon barristers.

The Government announced in December that KPMG was carrying out a business analysis of the financing of CFAs and their effect on lawyers. So far we have not seen it. I can only assume that when the decisions were made or when the consultation paper was drafted and produced, the KPMG report was not, and still is not, to hand.

The injured person who under these proposals will have no choice but will have to enter into a conditional fee agreement will face the following disadvantages. First, he will face increased costs. He will be charged the cost of up-front financing of disbursements—of counsel's fees, experts' fees and court fees. A firm of solicitors cannot be expected to carry any ongoing load of such disbursements. A firm with some 50 CFAs in operation at any one time is liable to be carrying a heavy and continuing burden of disbursements, as one agreement succeeds upon another, on which it will have presumably to obtain financing, and ultimately the cost of that financing will fall upon the client.

Secondly, the injured person will have to face the payment of an uplift in his lawyer's fees—the success fee of up to 100 per cent. of the ordinary fee—and that is in effect a premium that the injured person will have to pay to his lawyers for undertaking the risk of failure. He may lose up to 25 per cent. of his damages—the cap voluntarily placed on the uplift calculation. The injured person will also have to pay insurance—the accident-line premiums at the moment vary between £95 and £300—and also, and importantly, he will pay at the beginning before risk assessment can be properly managed; and no doubt as the case goes along there will not be the same quality control that exists at the moment when the Legal Aid Board requires, as each step in a case takes place, that the step is supported by counsel's opinion.

I know of only one assessment of conditional fee agreements, provided to me by the senior partner of a large, nationwide firm of solicitors with a large litigation department. As at 9th January this year, it had entered into 491 conditional fee agreements—the House will recall that the figure for the Policy Studies Unit was 197—of which 56 had been successfully completed and four had failed. The rest were ongoing. The average percentage success fee in 37 of the successful cases was 25.18—that was the average uplift it had charged—and it had recovered £21,311.26 in fees. On the other hand, the estimated cost of the four lost cases was £15,000. This firm, which has a very large turnover, had entered into a large number of conditional fee agreements. On balance, on 9th January, it was ahead by some £6,000, but only one more unsuccessful case out of the 56 cases would have left it behind. For small to medium sized firms, many of which may be encouraged to advertise for fresh clients, the ability to spread the risk over a large number of cases simply does not arise. A loss rate of 8 per cent., as in the example I have quoted, cannot be confidently predicted.

As for the Bar, the individual barrister who does not operate in partnership will have the riskier cases. There will be no early settlements for him. I cannot accept that it is in the public interest that the risk in litigation should fall on the individual barrister. Even if it does not encourage him to act unethically by settling at too low a figure, or withholding evidence, and matters of that kind which are occasionally raised as spectres, he could still be bankrupted by a string of unsuccessful cases which, on the cab rank principle, he cannot refuse. As I have said, the risk cannot always be accurately assessed even at the door of the court.

It may be that these fears will prove to be unjustified—experience will show. The views of plaintiffs who have entered into conditional fee agreements could be obtained. That is why it is premature to move wholesale to one method of funding—the conditional fee agreement.

I welcome the Government's undertaking to take reserve powers to allow them to establish a contingency legal aid fund, which was first urged by Justice in 1966 and is supported by many people. I will assume that your Lordships are all familiar with the way in which a conditional legal aid fund will work. The Association of Personal Injury Lawyers has suggested an interesting variant—that the negligent defendant should pay a fixed percentage of damages awarded into the fund, so that the wrongdoer, and not the victim, would pay. The Bar Council proposal is that a fixed percentage of the damages recovered by the successful plaintiff should go into that fund.

There are two critical issues. The first is the set-up costs. Both CFAs and CLAF are expected in the long-term to be self-financing. But the model provided for the Bar Council by Mr. Martin Chalkley in the preliminary feasibility study suggests start-up funding of possibly £30 million which will be required to be provided either by an assignment of part of the legal aid fund or by a loan. The Government's thinking on this may perhaps be best assessed from the consultation document, which says: [The government] remains unconvinced that a Claf which required subsidising from public funds, whether as a start up loan or ongoing support, has sufficient priority of funding or would be an appropriate use of taxpayer's money".

The other problem is adverse selection. There is no research into the reaction of plaintiffs to CFAs. We do not know whether they are successful. The Government assume that clients would choose to pay an uplift—increased costs—rather than a fixed proportion of damages recovered. If the APIL solution were adopted, whereby defendants pay the percentage to the fund, I think they would be much more likely to choose a CLAF approach. What is needed is full assessment, and that requires time.

That is what this Question is about. "No win, no fee" is nothing more than a slogan. Remember the American attorney who advertised, "I don't charge my clients anything. I just give them 50 per cent. of what I get for them". In 1997, legally aided accident victims recovered £502 million in compensation at a net cost to the Legal Aid Board of £34 million, a fraction of the total legal aid budget of £1.4 billion. This is not something to be thrown away lightly. I ask for time.

7.47 p.m.

Lord Ackner

My Lords, we live in very strange times. From the Statute of Westminster in 1275 until a little less than 10 years ago speculative litigation was contrary to public policy. This was because it was considered that it affected, as it does, the independence of the lawyer so that his advice might be distorted, he might exploit his client and he might engage in practices which were contrary to the interests of justice and thus undermine its integrity.

Section 58 of the Courts and Legal Services Act 1990 changed the situation and made conditional fee arrangements permissible. It was introduced, I am sorry to say, and I believe quite unintentionally, on a false prospectus. We were told initially that only 5 per cent. could be added to the cost of the solicitor. Later on it was increased to 10 per cent., then to 20 per cent.; and then, with great hostility from the Lord Chancellor's own advisory committee, it went up to 100 per cent. But as has been pointed out, it was intended, and an amendment was made by the noble Lord, Lord Mishcon, that it would have no effect on legal aid. As a result we have Section 15(4)(a) of the Legal Aid Act 1988 which provides, A person shall not be refused representation for the purpose of any proceedings on the grounds (however expressed) that it would be more appropriate for him and a legal representative of his to enter into conditional fee agreement (as defined by Section 58 of the Courts and Legal Services Act 1990)". Despite the noble and learned Lord the Lord Chancellor, at the annual meeting of the Bar Council, drawing attention to the fact that, Supporters of legal aid must never cease to emphasise that it is a highly successful public social service", it is now proposed that legal aid should go in money recovery cases and in its place should come the conditional fee. The noble and learned Lord the Lord Chancellor may recollect the debate that took place on the Conditional Fee Agreements Order—which the Government then very nearly lost—in 1995, and his comments as regards the uplift. He said, at col. 1153 of Hansard for 12th June 1995: Personal injury cases, as the noble and learned Lord has rightly observed, are a low risk area of litigation from the standpoint of plaintiffs. In the vast majority the plaintiff succeeds in whole or in part. In fact I understand that around 95 per cent. settle, to the advantage of plaintiffs, without any court order. In my view the first thoughts of the noble and learned Lord on the Woolsack on this subject were correct. A 10 per cent. or at most a 20 per cent. uplift was sufficient incentive. He should have adhered to that". I do not know whether that accounted for the statement that has already been referred to in Access to Justice: A Fair Way Forward produced, I believe, for the Labour Party Conference in 1995, where it is said, We regard conditional fees as an experiment to be monitored closely". I emphasise those observations because it was the Lord Chancellor's own advisory committee who advised the noble and learned Lord's predecessor in 1995 that, given the novelty and the potential risk to litigants of this untried scheme, it must be effectively monitored and merely monitoring a sample was not, in the Committee's view, sufficient.

Conditional fees were introduced in July 1995 and all the Lord Chancellor's Advisory Committee was permitted to do was to commission the Policy Studies Institute to provide a report on a sample. That was done in the report, which is entitled The price of success. Reference has already been made to the size of the sample. I merely wish to refer to three excerpts from the report. At page xvii it states, Many of the potential problems identified before conditional fees were introduced seem to have been successfully addressed". That is an observation which the Government have relied on frequently. In the next sentence the report continues, However, there are still two areas of difficulty, and these are the two most crucial elements to the success of the scheme: the estimation of risk and the calculation of the uplift". I turn to the conclusions at page 84 and read out this short excerpt: In this section, the conclusions of the rest of the report are brought together and recommendations made. The recommendations almost all consist of further suggestions for future research or monitoring. Although the survey has answered many questions about conditional fees, it has probably raised more". Finally, and perhaps most important of all, is the following quotation from page 86. It is headed "Assessment of Risk". It states, The research raises serious questions about the way in which solicitors assess the probability of success of cases. Personal injury claims generally have a very high success rate, yet solicitors in this survey rated a large proportion of cases as having relatively small chances of success. There are a number of possible explanations"— and these are referred to— This is a crucial issue, because it affects the level of fees that the client pays to compensate the solicitor for the risk of not being paid at all. If the public suspects that solicitors are inaccurately estimating the risk, it will undermine their confidence in the whole system. If they believe that solicitors are doing so in order deliberately to inflate the uplift, despite rules on professional conduct, there is a risk that the whole conditional fees system could be brought into disrepute. This would have serious implications for the extension of conditional fees [in other areas]. It then sets out the various respects in which further inquiries should be made and cautions against any extension to other areas of civil litigation until the problems that it raises are addressed.

In the speech which the noble and learned Lord the Lord Chancellor made at Cardiff, which was in the month after this report was published—and the report went to him par excellence, no mention at all was made of the report—there was this observation, Conditional fees are working well in the personal injury field". Were they, my Lords? Not from the perspective of the litigant. The average level of uplift was 43 per cent. That is in a field where 90-plus per cent. of the cases were bound to succeed. In 10 per cent. (one in ten) cases, the uplift was between 90 per cent. and 100 per cent.

I remind your Lordships of the Lord Chancellor's comments that 10 per cent., or at the most, 20 per cent., was quite appropriate in this field. So prima facie some—and may be a greater part—of the litigants, to use the vernacular had been "ripped off". Why was not this mentioned? Has there been—as it would appear—some economy with the truth? Only further monitoring can show what happened to the claims. Were there any writs? Were they followed by actions? Were the actions fought out, and with what result?

There was a debate in this House on 9th December on the Lord Chancellor's Cardiff statement. I submitted—largely on the material which I have mentioned—that we do not know enough yet about conditional fee arrangements and how they work, to allow them to take the place of legal aid.

There was a television programme on 20th January, File on 4. Again, this would have been well known to the Lord Chancellor and his department because featured on that programme was his right-hand man in the other place, Mr. Hoon, who observed—I quote from page 11 of the transcript: There was a specific piece of academic research conducted by the PSI into a number of cases, by no means the total, but which concluded that there were no substantial difficulties about the way that the scheme worked and indeed which encouraged us to consider extending conditional fees". There is no indication that those carrying out the research had any form of reservation or anxiety.

Fortunately, the lady who carried out the research, Miss Yarrow, was also on the programme and, having heard what Mr. Hoon had said, she said: We're concerned that solicitors may not be calculating accurately the risk of success of the case, and it's on that calculation that the whole success fee is based. They seem to he saying that cases are higher risk than they actually are, and that then means that the client is going to pay more. I think the issues about the way the success fee is calculated have not really been resolved, and more attention needs to be given to this before such a drastic action is taken"— that is, of course, replacing legal aid— And so far we haven't seen any signs from the Lord Chancellor's department that they are addressing this issue. Instead they've tended to concentrate on the positive aspects of our findings", which I read out a short while ago.

I tabled a Written Question on 18th February in these terms, to ask Her Majesty's Government: Whether, since the publication in September 1997 by the Policy Studies Institute of its report, The Price of Success, they have carried out or caused to be carried out any research to determine whether the practice of conditional fees is working; and if not why not". Back came the answer, signed by the Lord Chancellor: In the five months since the Policy Studies Institute report was published, I have not commissioned further research on the practice of conditional fees. As the noble and learned Lord will know, the Policy Studies Institute report concluded that many of the potential problems identified with conditional fees before they were introduced appear to have been successfully addressed. I accept that further research, at the appropriate time, may be necessary and I plan to seek views on what further research might prove useful in the consultation paper that I plan to issue shortly".—[Official Report, 18/2/98; col. WA 49.] I submit to your Lordships that that is grossly unsatisfactory.

In the observation made by my noble and learned friend the Lord Chancellor on the legal aid Statement on 4th March, he said: the overall picture that emerges is that the scheme seems to be working as intended".—[Official Report, 4/3/98; col. 1211.] I submit that on the material I have produced, it is doing no such thing. If the monitoring had continued, one would have seen clear evidence of the extent to which litigants had been required to pay, on the Lord Chancellor's own approach, more than was appropriate. That is why I used the words "economy with the truth". I respectfully submit that at this stage it would be quite wrong to carry the use of conditional fee agreements any further and that attention should be applied to the approach of the Bar Council in its Conditional Legal Aid Fund suggestions.

8.4 p.m.

Lord Brightman

My Lords, I appreciate that this Unstarred Question is primarily focused on conditional fee agreements between lawyers and their clients—the lawyers being rewarded financially for winning the case and penalised if the case is lost. But I hope that I will not be straying too far from the question if I confine myself to a few words in favour of the contingency legal aid fund, commonly called CLAF, in which the lawyer is not involved financially.

There is unfortunately some confusion between the two schemes owing to the similarity of names. The contingency legal aid fund, CLAF, is sometimes called the "Conditional Legal Aid Fund". I refer, for example, to Hansard of 4th March at col. 1209, which does not stand alone. That can readily be confused with the conditional fee agreement which the plaintiff negotiates with his lawyers. This can lead to a misunderstanding on a quick reading of Hansard. To avoid any confusion, I intend to refer to the conditional fee agreement as "the solicitor scheme", for want of a better label, and then it cannot be confused with CLAF, which has no financial association with the solicitor or barrister.

It has always been a mystery to me why governments have not been enthusiastic about CLAF. That lack of enthusiasm has been evident from time to time, and certainly since the then Lord Chancellor's consultation paper in 1991. CLAF has much to commend it. It has a first-class track record in Hong Kong, where it has thrived for 14 years. Once set up, it is self-financing. It covers not only the plaintiff's legal costs if the action fails, but also the plaintiff's liability to pay the defendant's legal costs, which the solicitor scheme does not. It can sit happily alongside the solicitor scheme and the state legal aid scheme.

CLAF is a virtuous scheme because the solicitor, who is an officer of the court with a duty to the court that overrides his duty to his client, is not financially involved in the success of his client's case. It cannot be denied that under the solicitor scheme this officer of the court is gambling on the success of one party to the litigation. I do not know whether some solicitors may feel a little embarrassed by a marked conflict between their interest and their duty. I should not be surprised if they do.

Despite the fact that the CLAF scheme can exist happily alongside the solicitor scheme and the state legal aid scheme, it has been continually cold-shouldered by governments. The usual argument against CLAF is that the solicitor scheme would cream off the strong cases, leaving only weak cases for CLAF— what is called in the consultation paper of March 1998 "adverse selection". I should like to spend a few brief moments examining the supposed reasons for this.

First, it is said that the solicitor scheme would—I quote from pages 27 and 28— be more profitable for lawyers". Speaking entirely for myself, I do not much like the sound of that argument. I would prefer a scheme which was better from the point of view of the litigant, but I entirely agree that CLAF does not purport to create any profit for the lawyer. It yields him no profit at all, except his ordinary costs. It is also said that under the solicitor scheme, The lawyers could offer more competitive terms to the client". I fail to see why that should be so. No reason is given. Anyway, is not competition a good thing?

Thirdly, it is said that the client would prefer, to pay a mark up on costs under [the solicitor scheme] rather than a surcharge oil potentially high damages". Why? No reason is given for this assertion. Why should a plaintiff prefer to pay to a solicitor an extra x per cent. of his legal costs rather than pay y per cent. of his damages to CLAF? I am not convinced by these supposed arguments for preferring the solicitor scheme to CLAF. CLAF has one advantage over the solicitor scheme. Under CLAF the plaintiff does not have to put his hand into his pocket to pay for insurance cover against the risk of being liable for the legal costs of the successful defendant. Under CLAF if the defendant wins, CLAF covers the cost. Per contra, the solicitor scheme does not of itself protect the unsuccessful plaintiff from having to pay the costs of the successful defendant. If the plaintiff wants cover he must take out insurance.

It is not possible in this short debate and at this hour to do justice to the arguments in favour of CLAF. I do not argue against the solicitor scheme; it is part of our law and is on the statute book. But I ask that the arguments in favour of CLAF are given further consideration.

8.11 p.m.

Lord Goodhart

My Lords, my noble friend's Question is extremely timely because of the publication by the noble and learned Lord the Lord Chancellor of the consultation paper last Wednesday. There is much in that consultation paper that I can support. Speaking for myself, I support the extension of conditional fee agreements (CFAs) beyond their existing boundaries. I support this proposal reluctantly because there are undoubtedly serious problems with CFAs. We face the danger of going the way of the USA where I believe contingent fees have done immense damage to the legal system, although that is in part because of features such as civil juries which do not exist in this country.

I accept however that it is unrealistic today to expect an uplift of the legal aid ceiling in real terms. For many who do not qualify for legal aid and cannot afford to take the risk of fighting a case and losing it, CFAs are better than nothing. Again speaking for myself, I support some of the other proposals in the consultation paper, such as having contracts with the Legal Aid Board, a strengthening of the criteria for the grant of legal aid, support for public interest cases and the Community Legal Service. But I strongly believe that it is premature to withdraw legal aid where it now exists before CFAs have proved themselves.

The PSI study to which my noble friend Lord Thomas of Gresford and the noble and learned Lord, Lord Ackner, have referred was encouraging as far as it went on CFAs in personal injury cases, but it was not conclusive. Certainly, it is not a sufficient basis for taking an irrevocable decision to withdraw legal aid from personal injury cases. We all know that personal injury cases, particularly those involving road accidents, are specially easy and suitable for CFAs, but beyond road accident cases—even in other kinds of personal injury case—it is far from clear that affordable insurance will be widely available, that in many cases solicitors will be able to take on the case with a reasonable mark-up—one that does not exceed 25 per cent. of the total damages—or that a significant number of solicitors will be willing and able to take on CFA cases at all.

I therefore urge that legal aid be retained alongside CFAs until it is clear that the latter will provide adequate access to justice for those who now qualify for legal aid. To retain legal aid at least on a temporary basis for personal injury cases will not be expensive. The net cost to the state of legal aid in personal injury cases in 1996–97 was £34 million, a mere 2.3 per cent. of the total net cost of legal aid. As against that, legally-aided plaintiffs in personal injury cases recovered £500 million in damages. When the recovery of state benefits out of those damages is taken into account the Government may even make a profit out of it. A particular problem for legally-aided plaintiffs is the funding of disbursements. The PSI study found that disbursements were funded by litigants in 75 per cent. of cases. Certainly, solicitors will be reluctant to fund disbursements. The Personal Injury Bar Association has said that the proposed reforms risk enfranchising middle England at the cost of disfranchising the poor.

I believe that there is a way that may well avoid most of these problems. I refer to the Contingency Legal Aid Fund to which the noble and learned Lord, Lord Brightman, has already spoken. In the debate last December I specifically raised the question of CLAF. I chaired the committee which reported on it for JUSTICE in 1975. However, I very much regret that the Government in the discussion paper have given a qualified negative reaction to the CLAF proposal. I hope that they can be persuaded to think again. The proposals for CLAF have been supported in different versions by the Bar Council, the Law Society, JUSTICE, the Consumers' Association and the Association of Personal Injury Lawyers. The Bar and the Law Society have so far not agreed on a single common CLAF scheme, but I do not believe that there is any difference of principle between them. I hope that a common scheme can be agreed between them reasonably soon.

The original CLAF scheme as proposed by JUSTICE provided for the CLAF success fee to be a percentage of damages. However, I am not persuaded that there is much to be said for altering that scheme so as to make the success fee a percentage of costs. CLAF will then be directly comparable with a CFA, except that the success fee will go to CLAF and not the lawyers. The lawyers will receive fees, including payments on account where appropriate, in the normal way, win or lose.

CLAF has two big advantages over CFAs. First, from the point of view of the administration of justice it removes the risk that lawyers will be tempted to commit professional misconduct to avoid the risk of personal loss. Cases of damaging documents being discovered half-way through litigation are well known and happen from time to time. It is hard enough for lawyers to bring themselves to disclose such documents when they suffer no penalty worse than perhaps some slight embarrassment or the of their clients. It will be much harder for them to do so if disclosure may cost them thousands of pounds, or perhaps tens of thousands of pounds, in lost costs. Secondly, CLAF has a very considerable benefit for lawyers. They have the certainty of recovering their proper profit costs and disbursements, including payments on account. I believe that most lawyers would prefer not to gamble on winning the case. That is even more true, of course, for solicitors than it is for the Bar, given that solicitors have much higher overheads.

The Achilles' heel of CFAs is the cost of funding firms' own work when they will not get paid for it until completion or settlement of the case, and they will not get paid at all if the case is lost. That needs a considerable extension of credit. Few firms, except the big City firms which will not do CFA work anyway, can obtain that amount of credit or, even if they could get it, could afford the cost of servicing it. The result will be that CFA work will be concentrated in the hands of a small number of firms with high CFA turnover—the kind of firm to which the noble and learned Lord, Lord Ackner, referred.

Client choice will, as a result, be limited, and in rural areas almost certainly non-existent. The Government's main objection to CLAF is adverse selection. I do not believe that that will happen. The great majority of firms, as I have already suggested, would prefer not to gamble on CFAs. The CLAF mark up, from the point of view of the client, will probably be lower than the CFA mark up because of the wider spreading of risk. Adverse selection could be, and indeed probably would be, avoided, by requiring all firms that become members of the CLAF scheme to undertake not to offer CFAs. The client will then have a choice of firms offering either CFAs or CLAF. The client can choose between them.

The client is likely to prefer a scheme when the mark-up is fixed by an independent body and not by the solicitors' firm which is likely to have a far greater knowledge than the client does, himself or herself, of what is a fair and reasonable mark-up. The client is, again, likely to prefer a scheme which avoids a conflict of interest between himself or herself and the lawyers acting.

The Government recognise that some of the savings from the reduction in legal aid will have to be used for transitional arrangements. I suggest that some of that money should be put into a pilot scheme for CLAF in a part of England which includes a major urban centre and more rural areas. The pilot CLAF will then run in that area alongside CFAs, and, of course, if too few solicitors sign up initially for the pilot scheme, it can be aborted at that stage without involving any costs. If a substantial number of solicitors signs up, then CLAF is likely to succeed.

The Bar Council announced today that it proposes to form a working group, including bankers and insurers, who can join with consumer representatives as well as lawyers, to report on the structure and funding of a CLAF scheme and its relationship with CFAs. The working party is unlikely to be able to report by 30th April, which is the closing date for responses to the discussion paper. It should be able to respond within a further two or three months. It is not realistic to expect the profession to provide the reasonable amount of funding that is required to get the scheme started. That will, if it is to have any hope of success, have to be provided by the Government, but there is every prospect that that initial funding will be capable of being repaid, with interest, within a relatively short period of time. Thereafter of course CLAF will be able to continue to operate on a zero net basis.

In view of the advantages of CLAF, I would ask the Government to co-operate with the Bar Council and its working party, and to take no steps in the meantime which would rule out CLAF on a pilot-scheme basis. I would ask the Government to postpone the abolition of legal aid in personal injury cases until it is clear that it is viable to do so.

8.25 p.m.

Lord Kingsland

My Lords, the Opposition adopt the views expressed by all noble Lords tonight so far on the positive role that a pilot project would play in relation to CLAF. They equally urge caution upon the noble and learned Lord the Lord Chancellor in relation to his recent expressions of support for CFAs.

If your Lordships glance at the principle that lies behind CLAF and gaze at the same time at the principle that lies behind the CFA, it will quickly be clear that the advantages of CLAF over the CFA are, in principle, powerful. CLAF is a nationwide system whereby premiums are paid by the winners to finance the losses of the losers. In the case of CFA, that insurance exercise is conducted discretely in each solicitors' firm that enters into a CFA scheme. The difference there of course is that the losers are paid by a national insurance policy.

There are a number of question marks over the viability of CFAs. First, we have seen no clear and hard evidence that the insurance companies are prepared to make available, at reasonable prices, the appropriate insurance for losers under a CFA scheme. Indeed, if one reflects upon it, that is not surprising. It is rather like a bookie in relation to a race containing horses of whose form he has no idea; likewise, insurance companies have not developed experience of the form of solicitors' firms or the nature of the risks that are undertaken in particular pieces of litigation. That may be something that develops over a period of time; but we are not in a position to say at the moment that insurance will be there at the right price.

Secondly, as the noble and learned Lord, Lord Ackner, said, it is not at all clear that premiums fairly reflecting the risk that solicitors take in engaging in litigation would be fairly set. That does not mean that I am casting aspersions on the integrity of the solicitors profession. Solicitors have to make their assessment at an unreasonable moment: before they know anything about the nature of the case and the risks that it will entail and before they have seen any of the most pertinent documents.

Again, as the noble Lord, Lord Thomas of Gresford, said, there is an enormous requirement for credit which a firm of solicitors will have to underwrite, which will unnecessarily add to the cost of any premium that they demand from their clients in the event of success.

All those things do not, of course, lead us to conclude that CFAs will never work; but they inject a large dose of caution into our approach to them. The House, I am sure, is delighted that the noble and learned Lord the Lord Chancellor is taking this long and careful look at legal aid. Its costs need keeping under control, and the service that it provides to people who otherwise do not have access to justice must be reviewed constantly. In his overall review of legal aid, the Opposition applaud particularly his desire to extend legal aid into areas such as the provision of social welfare, immigration and other areas where preventive legal advice will save so much money by avoiding ensuing litigation. All that is to be greatly applauded.

But it is a great puzzle to me that of all the ingredients in the legal aid budget at the moment, the one ingredient upon which the noble and learned Lord the Lord Chancellor has fastened has been personal injuries and the need to take them out of tax-paid legal aid. As your Lordships well know, this is the one section in the legal aid budget which effectively washes its face. The net saving of taking it out of the budget completely will be no more than £20 million. If the noble and learned Lord the Lord Chancellor wants to place, as his first priority, a dramatic reduction in the legal aid budget, two or three other areas are far better candidates than personal injuries.

In saying that, I am not saying that CFAs should be rejected out of hand. I am saying that they should be seen in context and should not be allowed to race ahead of the careful consideration of CLAF. Let us take the advice which has come from the Liberal Democrat Benches and from noble and learned Lords; let us have a pilot project for CLAF, a continuing review of CFAs and, above all, a clear desire to put the interests of the poorest litigants first.

8.30 p.m.

The Lord Chancellor

My Lords, the noble Lord, Lord Thomas of Gresford, asks me to postpone my own proposals to extend access to justice through conditional fees in the light of the Bar's proposals in Access to Justice and, until the fullest investigation and research has been completed", into conditional fees, and what he calls their "associated problems".

In publishing a consultation document on this subject only last week, I made plain that I have been listening to the legal profession, to insurers, to bankers and, most importantly, to those who claim to speak for people who seek justice through the civil courts. I, my junior Minister and my officials have had many discussions since I set out last October in my Cardiff speech my vision for greater access to justice. The consultation document re-affirms the approach I set out then, explaining my proposals in more detail and reflecting arguments put to me about the pace of change. I welcome the qualified support which the noble Lord, Lord Goodhart, felt able to offer to many parts of the consultation paper.

One concern put to me was that lawyers would not be able to modernise their practices quickly enough, nor would the insurance industry be ready early enough with the full range of products necessary to make fullest use of conditional fee agreements, by next month, when I had indicated I might seek to bring changes into effect. I now expect to make these changes some months later. This will give practitioners more time to plan for the radically different arrangements for financing civil cases which I propose to set in place.

The noble Lord, Lord Thomas of Gresford, mentioned the anticipated KPMG report and observed that a decision was taken to publish the consultation paper proposing the substitution of CFAs for legal aid in personal injury cases prior to publication of the KPMG report. However, its findings were available to us. They are being put into the form of a report with examples for publication. I anticipate that publication will be within about a couple of weeks. The report will indicate that conditional fees offer profitable business to lawyers even where they, rather than their clients, meet the up-front costs of insurance and running the case. I anticipate the report, which will be published, and your Lordships will study it and form a view.

The body looked at the impact of taking on conditional fee agreements in small, medium and large firms in terms of their cash flow and in circumstances where they would no longer receive payments on account from legal aid. The indications are that they move into a positive cash flow quite quickly and that profits then flow steadily. However, I appreciate that your Lordships will desire to await consideration of the published report.

I have also accepted that medical negligence cases should remain in legal aid for the present. I believe that the market will, in time, cater adequately for such cases, but that that time is not quite come. Thus, again, I am giving lawyers, insurers and others not only time to adjust but also a sound basis on which to plan. However, meanwhile we must tackle the poor results which are often obtained for clients in medical negligence cases. This is why I propose that legal aid should be available in those cases only through solicitors who can show themselves expert in this field.

We recognise that in the transitional period there may be other kinds of personal injury cases which do not readily attract conditional fees. They might have very high investigative or overall costs so that lawyers, as they currently arrange their business, may not be able to fund them, or they may raise a novel point of law. We have, therefore, carefully proposed a transitional fund to provide some continuing public subsidy in such cases. And, again, that will allow time for the lawyers and others to adjust.

In all, I have given the profession and others something of a breathing space compared with my original timetable, which, I accept, some regarded as too exacting. Therefore, I have responded to the Latin dictum, festina lente, but I believe that I must make some measured progress. Therefore, I address the question: why am I unready to delay further? The answer is that radical reform of civil justice and legal aid is both necessary and urgent. The costs of going to law are simply too high for the majority of people who neither qualify for legal aid, nor are so rich that they can simply disregard the financial risks of litigation. The extension of conditional fees will bring those people access to justice, which they are presently denied.

I am asked why we could not extend conditional fees without restricting legal aid. The answer is twofold. First, the money available for legal aid is finite. If it is to meet as much need as possible, we should not be wasting it on cases that can be funded privately. Secondly, legal aid tilts litigation in favour of those who are legally aided. They carry little or no financial burden or risk. Yet their unaided opponents in practice do not recover their costs if they win. This is widely perceived by many as unfair and can be a means of advancing a blackmailing claim which it is cheaper for a defendant to settle than to fight. It is not a system that should be used unless there is no reasonable alternative.

The present arrangements are glaringly unsatisfactory. The bill which the taxpayer is required to meet through civil legal aid has shot up dramatically year on year to help fewer and fewer people.

Meanwhile, conditional fees, where they have developed, have already helped nearly 35,000 people to pursue claims. We can reasonably surmise that most of these could not have afforded or contemplated otherwise. That is in just two-and-a-half years. Cases supported by conditional fee agreements have secured £30 million in damages for wrongs which would otherwise almost certainly not have secured redress. Although the noble Lord has referred to the problems of conditional fee agreements, they have been working well since 1995. As I and my junior Minister have said, the complaints which reach us are never about conditional fees; they are about the unfairness and excessive cost of legal aid.

I have referred before to the study of the Policy Studies Institute. It did say that many of the potential problems identified before conditional fees were introduced seemed to have been successfully overcome. I accept entirely that the institute's report said that further research would be desirable. That is not surprising when conditional fee agreements have not been able, alongside the present terms of legal aid, to reach their full potential to bring access to justice.

Let us look at the so-called problems of conditional fee agreements and, first, insurance. This is desirable against the risk of having to meet the opponent's costs if the action is unsuccessful, and disbursements—such as the costs of medical or other expert reports—will not then be recoverable from the other party. Premiums for personal injury proceedings, in which conditional fee agreements have been allowed since 1995, are typically £100 to £150. For many of those who will gain access to justice, which they are denied now, that is not an excessive sum.

There will, of course, be people who could not afford even a sum of that order or the up-front costs of running the case. But this need not be a bar to their bringing proceedings with conditional fees. It is surely not unreasonable to ask that the solicitors, who stand to make very substantial profits when cases are successful, bear those costs.

We are also talking to the insurance industry about new products under which the insurance premium would not have to be paid in advance, but afterwards, and only in successful cases where damages are secured.

I shall say a few words about risk assessment. Certainly it is my purpose that solicitors should no longer be able to rely on receiving their full fee, inclusive of overheads and profit—win, lose or draw. I want them to be more discriminating about their client's prospect of success. The more forward-looking firms have long ago faced up to the need for better risk assessment.

There was much said about the uplift before conditional fees were introduced. It was supposed that solicitors would charge the maximum uplift and leave their clients with little in damages. Those fears have simply not been realised. The Policy Studies Institute found that three-quarters of the cases it looked at had success fees of half of the solicitor's fee or less. The average success fee was 43 per cent. That study also found that the Law Society's recommendation that a success fee should not exceed one quarter of the damages awarded was almost always met. The early fears about the uplift were unfounded.

I listened with care to what the noble and learned Lord, Lord Ackner, said about personal injury claims and his suggestion that in the light of the considerable success achieved in that class of litigation an average success fee of 43 per cent. is too high. That is certainly a proposition coming from him to which I listened with care and on which I shall invite the Law Society's express comments.

I have explained why in my view there is no need for me to hold back on my proposals and why, to the contrary, there is every reason to move ahead. I shall now respond briefly to the suggestion that we should delay specifically to investigate the Bar's proposal for a contingency legal aid fund. It is true that my main concern about that proposition is adverse selection.

The Bar's proposal is that in time it would be possible for a fund of this kind to be self-financing, meeting the costs of difficult losing cases from a success fee in other cases. In the short term, because costs would be incurred before cases were won and success fees received, the fund would inevitably be in deficit. The Law Society has made a similar proposal, although it would give the solicitor a wider choice of the terms on which he wished to finance the case.

The proposed Contingency Legal Aid Fund would not address the point I raised at the outset; namely, the prospective unfairness that if it supports an action which fails, the successful opponent is left to bear his own costs. That alone should give many pause.

More importantly, as we discuss in the consultation document, the Government find it hard to believe that a fund of the kind proposed would in fact be self-financing, even in the long term, while conditional fee agreements continued to be available outside the CLAF. A lawyer who saw that a case had good prospects would see financial advantage in taking it on a conditional fee agreement. If he turned instead to the Contingency Legal Aid Fund, he would know that when he won, as expected, the fund would take a share of his success fee. What I require persuasion about is that there would always be a temptation, to which many would yield, to run stronger cases on conditional fee agreements while allocating to the fund the weaker cases.

Lord Goodhart

My Lords, I wonder whether the noble and learned Lord would be prepared to take into account the suggestion which I made in my speech that solicitors should be required to elect between offering CLAF and offering CFA, in which case they would not be in a position to cherry-pick stronger cases, if indeed that is a risk.

The Lord Chancellor

My Lords, I certainly did hear that suggestion made by the noble Lord, Lord Goodhart, in his interesting speech, and certainly I shall consider it. The proposition appears to be that solicitors should divide themselves into two classes: those who do cases on CLAF and those who do cases on conditional fee agreements. By giving an immediate response today. I do not desire to suggest that. I shall not consider the suggestion fully. Of course I shall consider it fully and carefully. However, my first reaction is that I do not really see that it meets the point that many cases which would otherwise go into the CLAF would be taken by those parts of the profession that would opt for conditional fee agreements to the exclusion of the CLAF, with the adverse economic consequences for the CLAF that I see.

It is also worth noting that the Bar's fund would not be open to all kinds of case. To illustrate how the fund might eventually be self-financing, and might make relatively modest claim on the taxpayer in the meantime, I have noted that the proposal confines itself to categories of case in which there are, relatively speaking, good prospects of securing good damages.

I have the gravest doubts as to whether the proposal could be made as attractive as it may seem at first sight. But we have invited views. If there is a genuine prospect of a self-financing fund, I suggest that it is a fair point that it could find financial backing in the private sector. In principle, the Government would welcome that as an additional means of improving access to justice.

I conclude on the following basis. We are ready to listen to any comments or proposals. We have opened a consultation process lasting until 30th April. I shall reflect with care on everything that was said during tonight's debate and will read it carefully in the Hansard report tomorrow. Although few speakers have participated, we have had a valuable debate. As I said, I shall consider the matter. However, I have to confess that, at first blush, I am not persuaded that we are fundamentally wrong in the broad approach that we are putting forward. But, my Lords, we will see.

House adjourned at eleven minutes before nine o'clock.