Referral fees continue to divide lawyers. What is more, Lord falconer has called for their abolition. Philip Hoult examines where the controversy is now heading


‘I am keen to see as much pressure as possible to get rid of referral fees.’ Lord Falconer’s dramatic intervention last month in one of the most sensitive areas of solicitors’ regulation came out of the blue. Speaking to journalists later at the Law Society’s annual conference, he went further, signalling his ‘distaste for the financial traffic in personal injury litigation’.



The Lord Chancellor’s unscripted comments are a major boost to those calling for a reinstatement of the ban on referral fees, which was lifted at a Law Society Council meeting in December 2003 by a 43-34 majority after several votes the other way in the months before. 



In its place was put a regime permitting their payment, but with safeguards including transparency and disclosure. Uniquely in the profession’s regulation, there was also a bid to control the behaviour of introducers by demanding that solicitors be satisfied with their behaviour towards clients.



The changes were approved in March 2004 by the then Master of the Rolls, Lord Phillips. Such were his reservations, however, that he insisted the Society review the decision after 12 months.



But this review was delayed – principally because the Society was preparing post-Clementi to split representation and regulation – and eventually left to the incoming Regulation Board.



The controversy over referral fees has rumbled on in the meantime, with two firms in particular at the centre of media storms.



In August 2004, Liverpool-based Higgins & Co was castigated in the press for offering to pay £175 to GPs for referred patients. More recently, Salisbury firm Trethowans was criticised for asking hairdressers and other local service providers to display cards for its family law team and hand them to clients where appropriate, with a £75 fee payable if a case developed. Press misreporting suggested Trethowans was asking hairdressers to inform on their clients. In neither case had the firms breached the rules.



Two and half years on from the lifting of the ban, a Law Society practice standards unit (PSU) report made for grim reading. Just 6% of 135 firms visited were found to have fully complied with the rules, with 39% committing significant breaches and 55% minor breaches.



Common failings included a complete lack of disclosure (34% systematically in breach), inadequate disclosure (17%), a failure to obtain an undertaking from the introducer to comply with the rules (47%), and a failure to ensure introducers are complying (61%).



But the research looked only at compliance – not at the quality of advice and whether it had been compromised, the extent of any public harm or client satisfaction or dissatisfaction.



Prior to the PSU report, the Regulation Board was already under pressure to carry out a formal review from the Society’s representation arm which, along with the Civil Justice Council, has concerns about the before-the-event (BTE) insurance market.



‘The one thing that has especially developed is the practice of BTE insurers charging very large fees for cases, which means that out of the fixed fee received under the predictable fee scheme, solicitors will be paying a very high proportion of that for the referral,’ explains Russell Wallman, policy director at Law Society Representation.



Referral fees of up to £750 for a personal injury case with a fixed fee of £1,350 are not uncommon, it appears. BTE is seen by some as non-insurance – motor or home policy-holders are paying £15 for legal expenses cover, but effectively buying nothing more than the dubious right for their insurer to sell their case to a solicitor.



‘If solicitors are working for less than half the fixed fee, there must be a real risk that they will be forced to tailor the amount of work they do,’ Mr Wallman adds. ‘Some may be in the business of getting any settlement quickly rather than getting the injured person the right amount.’



There have also been fears over some firms’ viability. Joy Kingsley, managing partner of leading Manchester firm Pannone, says that the going rate for referrals in the personal injury market has led to smaller practices folding. ‘As soon as one person is prepared to pay the wrong amount, then everyone else has to compete,’ she says. ‘People are competing at ridiculously low rates.’



Ms Kingsley says firms need to be strong with introducers, but recognises it is difficult – Pannone is able to because it has an £11 million-turnover personal injury business and ‘always gets work from one source or another’. But such is the market pressure, she reports, that her firm is offered files from firms trying to pull out of personal injury work ‘usually two to three times a week’.



Against this backdrop, the Regulation Board decided in September to launch a review of the underlying principles governing referral fees and crack down on firms in breach.



Chairman Peter Williamson says it is well placed, as a new board with a substantial lay membership, to take a fresh look from a consumer and public interest perspective at its November meeting. ‘We also have the experience of non-compliance… which makes it different from before,’ he adds. ‘We have some evidence but we will be trying to get more.’



Ongoing work by the PSU and the professional ethics unit – particularly around relationships with claims management companies – has uncovered a ‘substantial number’ of rule breaches, the Gazette has since learned.



Mr Williamson, who feels the rules are ‘not unworkable’, says the board will be looking at the whole ethical background. ‘Does this all fly in the face of what it is to be a solicitor? I am not expressing a view, but it is a question that should be asked.’



What the board decides to do next remains to be seen, but it would be a surprise – given Lord Falconer’s comments – if it does not conduct a fuller review, even though its rules and ethics committee has previously argued that this cannot be justified. It must also presumably allow time for its enforcement programme to have an impact or be shown not to have worked.



In the short term, consultation and further research are likely. Mr Williamson says it needs to find out more about the non-compliance, such as whether solicitors are ignorant of the rules, do not understand them or are deliberately flouting them.



Longer term, the board’s options include imposing different regimes for different areas of practice or a return to an outright ban.



One question is whether the board can distinguish between those operating the rule properly and those having a damaging effect on the public interest. As Mr Wallman says, ‘if it is not possible to distinguish between them, is any public interest in the “proper“ referral fees arrangement outweighed by the damage caused by the others?’



However, if the answer is yes, it raises a further question: is it possible to put the genie back in the bottle? Would a ban drive the issue underground?



In contrast to Lord Falconer, Mark Boleat, the government’s head of claims management regulation, says a ban is not the solution as there is always a way around it. ‘A ban would not work – you would have subscriptions instead,’ he says. ‘At least with referral fees, there is a chance of it being transparent.’ Mr Boleat also insists that better enforcement ‘will make all the difference’.



The profession appears deeply split, particularly in personal injury and conveyancing – the battlegrounds where referral fees are most prevalent. However, they have popped up in many other areas, such as commercial work, and even the likes of football agents are said to demand them.



Critics say the existing regime is not working and that it is next to impossible to make it work. ‘To reassure consumers, [the profession] set up a dismally inadequate system… which paid lip service to the consumer interest,’ says Fraser Whitehead, a senior litigation partner at Russell Jones & Walker, member of the Law Society Council and chairman of the Law Society’s dispute resolution section. ‘Transparency is a red herring and solicitors have let consumers down. On top of that, non-compliance is significant and on such a scale that it’s now clear that effective compliance is a myth – the profession can’t deliver.’



The fees, he claims, are seen as corrupt and corrupting. ‘The pro-referral fee mantras that they increase access to lawyers and increase competition, though sincerely argued, just don’t wash. The reality is huge numbers of clients are being excluded from their own choice of lawyer.’



Frank Maher, a partner at Liverpool firm Legal Risk and an adviser to firms on compliance issues, also argues that ‘if anything, referral fees are operating to reduce clients’ choice as they point them in a particular direction’.



‘My real concern is that once you have gone down the slippery path of paying them and you get into a close relationship, it’s difficult in practice to maintain your independence,’ he adds.



There are nevertheless plenty of people who believe radical changes – and certainly a return to a ban – would be excessive.



Andrew Twambley, senior partner of high-profile Manchester claimant personal injury firm Amelans and chairman of the Claims Standards Council, says the Regulation Board needs to ensure solicitors understand and implement the rules better. ‘The problem is that the big firms know about the rules, but there are a lot [of other firms] out there who dabble and they don’t have a clue,’ he says. ‘It’s an education problem.’



Richard Barnett, senior partner of volume conveyancer Barnetts in Southport, agrees, adding that education is a job for the representation arm as well. ‘It is just a learning curve – people want to live by the rules,’ he suggests. ‘The board sets the rules, and it’s up to the Law Society to assist members in implementing them. That’s what you expect from a

trade union.’



Others – such as Andrew Tubbs, chairman of regional heavyweight Shoosmiths – insist that referral fees have delivered consumer benefits. ‘A lot of the referral fees are invested in the integration of the service proposition, the linkages between the large insurer and the law firm,’ he says. ‘It builds a better proposition that benefits the consumer. They get weekend working hours, longer service hours. People don’t want to put a suit on to go and see a solicitor in the middle of the day.’



One hurdle that moves to reinstate a ban or impose greater restrictions will face is the issue of competition – the Office of Fair Trading (OFT) will watch any move closely.



Responding to Lord Falconer’s comments, an OFT spokesman insisted that so long as ‘the solicitor’s terms and conditions on referral fees are fair and open, then there should not be too much of a problem’.



The OFT, whose pressure in part prompted the lifting of the ban, has long been concerned about the impact of restrictions on the development of the legal services market, particularly on-line.



Commenting recently on the Law Society’s application for approval of its draft code of conduct, it said a ban could prevent solicitors competing effectively with others less appropriately qualified. ‘Given the potential detriment to solicitors but more importantly to their clients, we think it important to stress that any reintroduction of the prohibition… must be based on sound evidence,’ it warned. ‘In particular, evidence would need to demonstrate clearly that such a step was necessary to the identified objective of safeguarding solicitors’ independence and integrity, and would thereby benefit clients and potential clients.’



Mr Williamson insists that it does have some of this ‘evidence-based justification’ already, but does not rule out further research, such as peer review.



Although establishing a threat to independence might win the OFT over, it may be that evidence of actual as opposed to theoretical harm will be needed. That could be hard to obtain, gross under-settlements in personal injury cases aside. Significantly, the PSU study found no evidence of overall inflation in legal fees as a result of payment for referrals.



The board may also face a challenge because the Council of Licensed Conveyancers has no plans to stop its members paying for referrals.



John Heller, chief executive of conveyancer Hammonds Direct, is totally in favour of referral fees, claiming they are part of normal working life. ‘I am a manufacturer,’ he says. ‘The introducers pay a huge amount of money for the marketing and the branding. I pay for the privilege of the work… and not having to commit to that expenditure.’



He denies that the fees add to clients’ costs – ‘I should be so lucky’ – and says a ban would be grossly unfair. ‘I’m not saying there would not be a legal challenge,’ he warns. ‘We would have to consider becoming licensed conveyancers. [For now] I’m very happy to be a solicitor.’



Mr Heller denies that referral fees are immoral, saying ‘it was immoral when it was under the counter and the client was unaware’.



Mr Barnett also suggests that it ‘would be fundamentally wrong to have one profession regulated to certain standards and another that operated to a different set of standards’. By taking the high ground, the argument runs, solicitors could inexorably lose market share.



Mr Williamson insists that while market considerations could be acknowledged, they should not be a prime factor in the regulator’s decision-making. ‘Our primary duty is to regulate to high standards in the interests of the public,’ he says. ‘The mere fact that someone else is doing something different would not influence our decision.’



So what will happen over the next 12 months? A formal review will take time and money, something the Law Society’s representation arm acknowledges despite considering the issue urgent. ‘We recognise that the board has to weigh the evidence and consult properly – they can’t just make a knee-jerk reaction,’ says Mr Wallman. ‘The time it takes to carry out the review should be the time it takes to do it properly, but it should not be held up by any competing work.’



The board can be expected to embark on a campaign to educate both solicitors and introducers, with Mr Williamson saying it may publish an information sheet on the rules in straightforward language, which could be kept on a solicitor’s desk as a reminder.



Educating introducers on compliance is more complex. The PSU report revealed that many practices felt disadvantaged if they insisted on introducers complying, as the work might go to less awkward firms.



However, help could be at hand. Mr Twambley says the Compensation Act 2006, which comes into force in April next year, should deal with the seedier side of claims management.



It is a point taken by Mr Williamson. ‘We are now in the position where we can talk to the claims management regulator [Mr Boleat],’ he says. ‘That could have a significant impact on enforcement.’



The issue of referral fees is arguably the first major test the board has had to face in its short lifetime. Its standard for rule-making is that it must be ‘necessary, clear, fair, enforceable, proportionate, targeted, and consistent’. When it comes to referral fees, this is far easier said than done.



However, the status quo is not an option. ‘We must ensure clients are independently advised,’ Mr Williamson says. ‘Solicitors should be prepared for a new approach and a possible impact on current arrangements.’