Up for referral

The Law Society’s Council voted earlier this month to amend its policy with respect to referral fees.

As well as urging government and the Legal Services Board to undertake proper research on the effect of referral fees, Council has decided that the society should argue that referral fees do not have a place in markets for legal services and that payment of referral fees by all providers of legal services should be banned.

The debate has a long history. Since the controversial decision to permit solicitors to pay referral fees, the Solicitors Regulation Authority (SRA) has looked at the matter, particularly in the light of findings which suggest that there is a significant lack of compliance with the rules governing referrals.

The SRA decided that it was inappropriate to reverse the current rules permitting referrals but thought that the rules and guidance needed further consideration. It is carrying this out now.

The main arguments against referral fees are well-known:
l They may restrict access to justice because clients are directed to a small number of firms.
l The relationship between the referrer and the solicitor may create a conflict if the solicitor is reluctant to criticise the referrer or advise the client against the interests of the referrer.
l The fees will come out of the solicitor’s profit costs and, given the amount of some, solicitors may have difficulties providing a good quality service for what is left of a fixed fee.
l They encourage middlemen and claims handlers whose business models rely on referral fees and may add little value.
l Although there are requirements for transparency and disclosure to clients, in fact, clients do not understand their implications.

Against this, it may be said: referral fees are widely paid; the market, particularly for conveyancing, works largely through them and the prohibition disadvantaged solicitors; the Office of Fair Trading’s view has been that prohibition is anti-competitive; if there is a ban, artificial ways will be found to circumvent it through fees for other services for example.

Such fees are actually marketing costs; some firms argue that they compare favourably with other means of advertising—abolishing referral fees would not save money to clients or to the legal system. There are few complaints from clients.

The issue has arisen recently in a number of contexts. Lord Justice Jackson in his review of civil litigation costs asked questions about their appropriateness and did not appear to find a compelling case for them to continue.

We await his report. Dominic Grieve MP, the Tory Shadow Minister for Justice, has recently described such fees as “mildly corrupting”. It is becoming clear that there are regulatory issues for firms, particularly in the personal injuries area about some agreements.

A number of firms are finding that the SRA is querying such agreements. They complain about a lack of guidance and consistency from the SRA. A number have decided to end arrangements rather than face uncertainty. This is unsatisfactory from any point of view.  Clarity from the SRA is urgently needed.

Insurance industry

The insurance industry dislikes such fees. Their stated position would be more impressive if many insurers did not require payment of referral fees from solicitors themselves. It appears that the insurance industry regards referral fees as bad if they are likely to add costs for them but good if they will improve their balance sheets. It is an understandable commercial position but it is not intellectually consistent.

In the debate, many council members argued referral fees were ethically wrong, akin to bribery and, therefore, against the fundamental ethos of the profession.

At least one speaker, however, recognised that solicitors have to work in a market: it does the profession no favours if it cannot compete with providers which are regulated on a different basis or are unregulated. The solicitors’ rules cannot work in isolation and the legal services board needs to ensure that there is consistency.

There needs to be proper research and understanding of the market before a final decision can be reached. That, however, need not stop the Law Society taking the view that referral fees are, fundamentally, inappropriate and risk compromising the ethics of the profession.

It is good news that the legal services board’s consumer panel has indicated that it will look at referral fees. While consumers may not particularly care about whether or not referral fees are paid, they may not be fully alive to the dangers that exist. Any legal services market should ensure that consumers are able to access the best possible legal advice for their problems. Council’s decision shows that it doubts that referral fees are consistent with that objective.

Desmond Hudson, Law Society chief executive

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