The referral fee conundrum

Referral fees have always been a contentious subject for all those involved in the provision of legal services. The concept of touting for business has always struck a nerve among the profession this side of the Atlantic. The question of paying third parties referral fees often gives rise to similar feelings and, as advertising has in the past, referral fees divide the profession.

Advertising or touting by solicitors was prohibited until 1987. While the ban for advertising was then lifted (much against the passionate efforts of many), solicitors were still prohibited from paying referral fees to third parties. That ban was partially lifted in 1988 but there remained a ban on paying referral fees to reward introducers of business. There were some slight amendments in 1991 but referral fees remained in the main banned until March 2004. 

In 2001 the Office of Fair Trading published a report on “Competition in Professions”. As part of that report, the Office of Fair Trading (OFT) recommended that the restrictions on referral fees should be lifted. It suggested that the ban was hampering competition to the detriment of consumers. After much debate, the Solicitors Conduct Rules were amended to allow solicitors to pay referral fees in March 2004. 

The subject has not gone away and certainly remains contentious. Only recently the Law Society Council debated the issue once again with very divergent views as to whether the ban on referral fees should be reintroduced; deciding effectively to reopen the issue, to review six years of practice. 

The Jackson lobby

The lobby for a ban gained a significant fillip from Lord Justice Jackson in his review of civil litigation costs. He concluded that the payment of referral fees for personal injury claims should be banned. He did provide a fallback suggestion that referral fees could be capped at a modest level. Here is not the place to revisit the rationale but in one aspect Jackson LJ concluded that referral fees were being funded out of recovered costs; this must mean that absent referral fees costs would be lower.

In completing his work on the subject Jackson LJ took the views of various stakeholders, including those attending his various seminars. Those in favour, which included the Association of Personal Injury Lawyers (APIL), commented that any ban on referral fees would be too late. APIL suggested that referral fees had not caused problems of substance and as the market matures it is addressing any shortcomings. APIL said a ban is too late: the genie in the bottle is out and will not go back in. In some confusing references, referral fees were captioned by some as “the elephant in the room”. 

Even where respondents to Jackson LJ might have been thought to have spoken with one voice they did not do so. APIL and the Personal Injury Bar Association took opposing views on the subject. 

Jackson LJ was not shy in also dealing with the OFT’s position. He expressed his own views of the OFT’s petition for the payment of referral fees, suggesting that there was ample authority to ban even if it might be said that there was an anti-competitive effect.

While Jackson LJ took a wide range of views on referral fees, he was not able within his remit to carry out an economic analysis of the effect of referral fees. He was the first to appreciate that many recommendations required further analysis and impact assessment.

Economic arguments

The recently published report from the Legal Services Board (LSB), however, has been able to undertake that exercise and now fills that gap (Cost benefit analysis of the impact of referral fees in legal services by Charles River Associates). In doing so it sought to establish the economic arguments for and against solicitors paying referral fees, looking at three particular areas of practice—conveyancing, criminal advocacy and personal injury. If you can find your way through the Executive Summary where most readers will finish their review the detailed results show the depth of the study and perhaps its failings.

For the civil litigation practitioner the study of the personal injury market has most relevance. The authors concentrate on the motor claims market. Jackson highlighted referral fees as an indication that the costs recovered by solicitors are too high because they allow the payment of referral fees. Oddly, for those coming from this point of view the dismissal of this argument in the LSB report lacks depth, possibly justifiably. 

In short, the authors suggest that with the vast majority of claims falling within the predictable or fixed costs regime the payment of referral fees does not increase fees. While hardly an in-depth appraisal of the Jackson view, the LSB report balances against any possible price increase the benefits of referral fees for insurers and ultimately the premium paying public but perhaps more importantly for the consumer the wider access to justice afforded by the activities of the referrers, the claims management companies. No coincidence, it is suggested, that the number of justified claims has increased since the ban on referral fees was lifted in 2004.

It pays for those in the debate to read the detail but perhaps the immediate impact of the LSB report is somewhat totemic. The House of Lords considered the government’s proposals on defamation costs which were endorsed by Jackson LJ and in rejecting them thought they might restrict access to justice. The LSB study examined the economic reasoning behind the Jackson proposal to ban referral fees and concluded that there is no increase in costs and in any event consumers benefit from referral fees. Whether it be genie or elephant in the room the LSB report identifies the elephant and suggests that the genie serves the Aladdins of the world rather well.

David Greene, consultant editor, NLJ & partner, Edwin Coe LLP. E-mail:
David.Greene@EdwinCoe.com
 

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