Yesterday’s news?

Date: 10 June 2011
Authors: David Greene
Issue: Vol 161, Issue 7469
Categories: Opinion, Fees

The advent of ABSs has knocked the referral fee debate off the front page, says David Greene

The refusal of the Legal Services Board (LSB) to ban referral fees may come as a disappointment to many. Ultimately, however, without evidence of widespread abuse the conclusion is that claims management companies (CMCs) are much better at introducing competition into the market place than solicitors. The same conclusion was reached in March 2001 by the Office of Fair Trading (OFT) leading to the lifting of the ban on referral fees in 2004.

The recommendations of the LSB report and the future of the referral fee regime rest on the three “R’s”, “Reveal, Regulate, Retain”. Although referral fees have faced a barrage of opposition from a wide range of stakeholders the decision is hardly surprising. As the report itself suggests, does it really matter? Are referral fees yesterday’s fashion? (See Referral Fees, Referral Arrangements and Fee Sharing.)

Opposition to payments made by solicitors for business is a rare point on which Lord Justice Jackson and the Law Society can agree. The Law Society has historically been somewhat equivocal in its opposition but publicly expresses the view that referral fees are an unnecessary burden on solicitors’ practice income.

Jackson, on the other hand, described referral fees as a “regrettable feature of civil litigation”. Based on his research Jackson concluded that referral fees are simply an additional cost for those ultimately liable, of little or no worth to the litigation process. The OFT and the LSB, with research undertaken by Charles River Associates, reasoned subsequently to the contrary suggesting there was no such evidence to support the Jackson conclusions.

Compensation culture?

While many rationalise opposition, a general feeling that payers of referral fees, in the main CMCs, are leeches on the justice process pervades much comment. Some of the methods adopted by CMCs to secure business do not assist in the reputational balance. It’s not yet as “in your face” as the billboard and TV advertising of US personal injury attorneys. Still, the peppering of daytime TV with personal injury adverts and the cold-calling methods of CMCs suggest to many the unnecessary generation of claims in an increasingly litigious world driving forward an alleged compensation culture.

There are few willing to stick their necks out suggesting referral fees should be encouraged. Even solicitors at the core of the referral process would welcome an alternative that works. That may be round the corner with alternative business structures (ABSs).

The LSB only goes so far as suggesting there is no evidence of the allegations proffered by Jackson, calling for greater transparency and regulatory control. The OFT is perhaps the strongest proponent but one suspects that its view may be tarred by an historical suspicion among the competition regulators of the professions, the age old “conspiracy against the laity”.

The main argument against a ban on referral fees is that it would merely see a shift of cost from referral fees to other methods of generating business. Many would suggest that without empirical evidence of a harm inflicted by referral fees any attempt to row back 10 years’ development in the delivery of legal services comes too late. The genie will not be enticed back to the bottle.

Fees debate killed off

It looks like this report kills the wider debate dead and it would be surprising if the government revived the idea of a ban. More importantly, both the LSB and the government recognise that the referral fee argument may be last year’s topic because this year sees the legal services market on “the threshold of substantial structural change”.

The LSB muses that one possible effect is that firms’ “dependence on referral fees may lessen and the importance of CMCs in the market decrease as firms become more effective at ‘client acquisition’ as a result of more professional management”. Law firms it suggests may move more deeply into claims management and CMCs may seek to gain a licence to become ABSs. Moreover, larger brands with better connection to clients may simply have greater marketing capability, so removing the need for claims management activity at all.

So the market could soon be sidelining the prominence that referral fees has come to gain over the past 10 years. A ban may indeed serve only to speed up a process of the establishment of ABSs by CMCs and insurers.

Perhaps the time has come to move on from the referral fee debate. The bigger question for practitioners now is how they can respond to this new form of competition from a growing band of non-lawyers offering legal services through the new kid on the block, ABSs. After a long overture Tesco law is finally to make its mark.

David Greene, senior partner, Edwin Coe LLP & consultant editor of NLJ.
E-mail: David.Greene@EdwinCoe.com Website: www.edwincoe.com

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