Second blow for supporters of referral fee ban

Any prospect of a new ban on referral fees has been dealt a second major blow in the space of a few weeks, as a new report for the Legal Services Board recommended that the fees should be retained last week.

The Legal Services Consumer Panel’s report called for greater disclosure of referral fees and better regulation, but found that the payments do have a place in the legal services market and should be allowed to continue.

The findings came hot the heels of an economic analysis from consultants Charles River Associates two weeks ago, which advised the LSB that there was no evidence that referral fees caused consumer detriment, in either the conveyancing or the personal injury market.

Publishing the consumer panel report, panel chair Dr Dianne Hayter said: ‘Greater transparency combined with tough action against rule-breakers is needed to ensure that referral fees work in the interests of consumers.

‘Referral fees have their problems, but they can increase access to justice while not raising prices or reducing the quality of advice. So long as the issues identified in the panel’s report are successfully tackled, referral fees have their place in the legal services market.’

The panel called for action to tackle a number of problems, including: the issue of closed bids and auctions, which mean work is referred to the lawyers paying the highest referral fees rather than the best lawyers; pressure-selling tactics by estate agents and insurers to get clients to accept the lawyers they recommend; high levels of non-compliance with transparency rules by conveyancers and estate agents; and competition concerns raised by the trend for introducers to refer work to a small number of large law firms.

However, despite these concerns, the panel said evidence suggests referral fees do not increase the prices paid by consumers for legal services or reduce the quality of work.

The panel’s report revealed the large sums of money that change hands between lawyers and introducers.

Conveyancers pay fees of up to £300 an instruction to estate agents, while claims management companies typically receive referral fees of £800 from a lawyer in respect of a client injured in a road traffic accident. Adding the costs of medical experts, car hire companies and others, the total commission paid in a single case can reach £1,500.

The consumer panel as set up by the LSB last November and referral fees were the first item on its agenda.

David Parton, residential conveyancing partner at regional firm Shoosmiths, said: ‘I can’t see how a ban could possibly [now] come to pass.

‘Prior to the election the Conservatives said they were not in favour of a ban. Ultimately if the LSB came down in favour of a ban, it would be going against the views of the Solicitors Regulation Authority; the consumer panel and the government.’

He said: ‘The general consensus is that a ban wouldn’t reflect the commercial reality of the way work is referred or the benefit of the system to consumers or lawyers.’

To return to a ban would be to ‘go back to the dark days’ where firms engaged in opaque arrangements to get around it, he said.

Richard Barnett, senior partner at volume conveyancer Barnetts and chair of the Law Society conveyancing and land law committee, said: ‘It's likely that referral fees will continue to be allowed, but with some revisions.’

‘It would be useful to reflect on where there might be difficulties with the current system. There needs to be some sanction for those introducers who abuse the system,’ he said.

Barnett said he would like to see ‘transparency and choice for consumers’, and those within the system should be made to ‘act responsibly’.

‘The real issue is not referral fees per se, but rather how the profession will be able to work alongside the new alternative business structures. A system needs to operate so that work can easily be referred where appropriate. If no system exists then the work will remain with those with the biggest brand name and biggest marketing budget.’

In November 2009, the Law Society Council voted to press the LSB to ban referral fees across the board.

Law Society president Robert Heslett said: ‘The Society is disappointed that the consumer panel has not recommended that referral fees should be banned. We believe these fees create a real danger that consumers will be treated as commodities that can be bought and sold and that the existence of the fees will either increase prices or place tensions on solicitors' duties to act in their clients' best interests.

‘Whatever final conclusions are drawn, we take the view that requiring an estate agent or insurer to tell their customer how much they sold their case for must be a minimum sensible reform,’ said Heslett.

Laurence Besemer, chief executive of the Forum of Insurance Lawyers, said that both the consumer panel report and the previous report by Charles River Associates, both of which found that there is no detriment to consumers, did not look at the wider public interest or economic impact of referral fees.

‘The consumer is wider than the claimant – those who pursue claims are a fraction of society. The cost of referral fees is picked up business and by those who pay insurance premiums but do not make claims,’ he said.

The LSB hopes to give its position on the issue by the end of the summer at the latest.