SRA powerless to stop ABSs circumventing referral ban

Regulators have warned they will be powerless to prevent the establishment of companies that would get around the ban on referral fees.

Alternative business structures encompassing both law firms and claims management companies may not fall within the scope of any ban, the Solicitors Regulation Authority said today.

The government has stated it that wants the payment and receipt of referral fees prohibited in all personal injury cases by April 2013. But an SRA discussion paper released today warned that a ban may not have any effect on the rising number of claims, because it is so difficult to define.

The paper said: ‘Many claims management companies may legitimately argue that they are carrying out marketing for groups of firms and that they are not caught by the ban. Such activities may be under particular scrutiny, as we will want to ensure that they are not being used to avoid the ban.

‘One of the government’s expressed aims is to reduce activities that actively encourage people to make unnecessary or spurious claims when they might not otherwise have done so. However, it is possible that the ban will not lead to this outcome because of the difficulty in definitions.’

On the subject of ABSs set up to find a way around the ban, the SRA said it could refuse a licence or impose conditions if they pose a threat to the public interest, but that there is little to prevent businesses that are not perceived to represent a threat.

‘There would be no need for referrals, and therefore no referral fees would be paid,’ it said. ‘We believe that, provided all of the requirements for authorisation are met and the ABS complies with all of its regulatory obligations, we cannot seek to prevent such arrangements simply because they are set up to avoid being caught by the ban.

‘An ABS is a legitimate form of business, supported by a strong statutory and regulatory framework.’

For those existing law firms that do rely on business garnered from referral fees, the paper warned there could be a ‘steep increase in the number of financial failures’.

It said: ‘Even for small firms who do not do significant amounts of this work, the potential loss of revenues could add to the cumulative effect of difficult economic conditions, difficulties in maintaining adequate levels of bank financing and the impact of loss of other revenue through the continued stagnation in the housing market.’

Talks are ongoing between the Ministry of Justice and the SRA about how to police the ban while its specifics are being finalised.

The SRA has completed a consultation on how the ban will be enforced and its regulatory affairs board will discuss the outcome when it meets next Tuesday.

President of the Law Society, John Wotton, said: 'We are ready to work with the SRA and other interested bodies in making the ban on referral fees for personal injury cases work – the measures adopted need to be straightforward, proportionate and effective.

'Care needs to be taken in implementation to ensure that the parliament’s intentions are achieved without unintended consequences. For instance, the ban should not prevent firms’ legitimate marketing activity.'