Should the board of the Solicitors Regulation Authority reimpose a ban on referral fees? the view from the profession is mixed, as Grania Langdon-Down reports


No solicitor likes them. Clients are being left in the dark about them. But is the ‘genie’ of referral fees now so far out of the bottle that the only option is to accept they are a market reality and clamp down on abuses?



That is the question facing the board of the Solicitors Regulation Authority (SRA) next week when it has its much-anticipated debate about the thorny issue of referral arrangements and decides whether to ban them once more.



One factor which the board will be taking into account is the findings of its recent public opinion poll of 917 adults and a series of focus groups, which uncovered ‘widespread ignorance’ among clients of the practice of paying referral fees. Four out of ten respondents said they would be concerned about the independence of the advice they received if they knew they were part of such an arrangement.



According to the focus groups, the key factor is transparency. Consumers are comfortable with the concept of referral fees as long as their existence is made clear, there is full disclosure of the fee involved and there is no direct cost to the client. As one commented: ‘I’m not unhappy as long as they are disclosed and as long as you can see who is dipping in the pot.’



However, the researchers say the perception is that the policy on disclosure is not being adhered to and that there is not enough information or transparency, which is driving the mixed feelings of consumers.



It is now more than three years since the longstanding ban on referral payments was lifted, allowing solicitors, subject to certain conditions, to pay referral fees to third parties. Up until July, referral fees were governed by the Solicitors Introduction and Referral Code, now replaced by rule 9 of the Solicitors Code of Conduct 2007 (see www.referrals.sra.org.uk).



Concern over disclosure, as well as disquiet that some firms were becoming too reliant on ‘introducers’, such as claims farmers, insurers or estate agents, for work, prompted the SRA to send all solicitors a warning in February making it clear they risked disciplinary action if they failed to follow the rules. The referral arrangements compliance project (RACP), run jointly through the SRA’s practice standards unit (PSU) and forensic investigations (F1), was set up to investigate a selection of firms.

An interim review of more than 60 cases found a third of firms had agreements which required solicitors to act contrary to their clients’ best interests and which could also compromise their independence, though in most cases there was no evidence solicitors had done so.



However, one partner each from two firms has been referred to the Solicitors Disciplinary Tribunal because of concern over the terms of their arrangements with a claims company. Another firm acknowledged it was ‘heavily dependent’ on one introducer and was deducting £300 from damages, while another paid 32% of its profits to conveyancing introducers and so was operating at a significant loss.



The review highlighted arrangements with introducers which were not in writing; failure to disclose arrangements to clients; and failure to ensure the introducer provided the client with all the relevant information. One report found panel firms were liable for a fee of more than £300 unless they managed to pay it to the introducer from the client’s damages.



The findings prompted the SRA, which is working closely with the new claims management regulator at the Ministry of Justice (MoJ), to warn introducers and their regulators that if an introducer persisted in leading solicitors to breach the regulatory requirements, the SRA would consider ‘naming and shaming’ them.



The review’s author, SRA legal director David Middleton, says their initial reaction is that compliance is improving, but there is ‘plenty of room’ for further improvement. Serious risks remain for clients because firms are so dependent on introducers (in one recent court case about the enforceability of conditional fee agreements, the law firm involved received 95% of its work from a particular claims manager).



Referral fees certainly provoke strong reactions among practitioners, particularly in the two areas where they are most widely used – personal injury and residential conveyancing.



Law Society-commissioned research into referral arrangements (see [2007] Gazette, 22 November, 1), found that personal injury (PI) lawyers are divided on whether the SRA should re-introduce the ban – split between those who pay them and those who do not – while conveyancers are strongly in favour of the genie being put firmly back in the bottle.



The report was based on 34 interviews with partners in PI and residential conveyancing firms. On average, the number of PI cases conducted per year by firms paying referral fees is a hundred times that of those which are not. The larger firms have between three and 60 introducers, and fees averaged £600 per case.



In residential conveyancing, firms paying referral fees conducted five times as many cases as those that did not, with average fees per case of £75-£125. But while residential conveyancing practices are not reliant on paying for business, the researchers found there is very little work in PI unless it is paid for.



Most practitioners dislike the practice, though others are more pragmatic. As one PI partner in a firm which has referral arrangements says: ‘I can’t stand it – it’s produced a whole new business riding on the back of solicitors’ inability to market themselves.’



But, says another PI partner, reintroducing the ban would be ‘mad’. He demands: ‘All other businesses can pay commissions, so why can’t solicitors?’ Another PI partner, also with referral arrangements, argues: ‘As far as I can see, it’s all good for everybody. It’s good for us, it’s good for the client. Their case is being progressed, they’re being regularly reported to, so they know what’s going on.’



The research found that referral fees are changing business models in the PI sector. One firm which processes 8,500 PI cases a year has one partner, a management team consisting of an accountant, an insurance professional and a compliance officer, and 85 employees, most of whom are not qualified solicitors. Another firm has bought a claims capture organisation to compete with the insurance and claims management companies.



Andrew Twambley is joint senior partner at leading PI firm Amelans in Manchester, which does not pay referral fees. Instead, it gets its work through the marketing vehicle Injurylawyers4u – which Amelans set up – reputation and advertising. ‘Nobody likes referral fees,’ he says. ‘They don’t look an attractive way of doing business. But it is the way the industry is now run and if you take them away, the whole thing will collapse like a pack of cards.’



Reintroducing the ban would also be detrimental to the public, he argues. ‘Whether you think they are good or bad, one offshoot is that cases go to more specialised players.’



Now the code has tightened up the rules, he believes referral fees can be controlled – ‘as long as the SRA keeps on the back of the perpetrators who abuse the system’.



Michael Garson, managing partner of London-based private client practice Kagan Moss, is less confident that abuses can be controlled. ‘The problem with enforcement is you can’t control what is going on outside the profession.’



His firm does n0t pay referral fees but, he explains, ‘we do have our own estate agency, which makes a difference’. He is against referral fees on moral grounds. ‘I don’t believe they are being properly disclosed and I don’t think clients understand what they are. As a business operation, they skew the competition. The way they are operating in conveyancing is scandalous because they are steering business which is being done on a regulated basis at the point of sale by people who are motivated by non-relevant criteria – money. There is no benefit to the client.’



Mr Garson chairs the Law Society’s property section but stresses he is giving his personal views because fellow members hold differing opinions. He dismisses the argument that referral fees improve the quality of service to clients because the solicitor wants to keep their relationship with the introducer. ‘It means the introducer is the judge of their work rather than the consumer,’ he says. ‘If the client understands and agrees with that, fine. But the reality is the introducer steers the client to their favoured person for reasons which have nothing to do with quality of service.’



For the representative bodies, referral fees are a difficult issue because of the split views of their membership.



Henry Bermingham, the new president of the Forum of Insurance Lawyers, will not give his personal view in case it is seen as the forum’s view. A partner with national commercial and insurance practice Berrymans Lace Mawer, he says: ‘We can’t espouse a party line. It makes it awkward for the representative bodies when some think referral fees are simply advertising costs and others think it is trafficking in litigation.’



However, he says the referral fee debate may be overtaken in the PI field by the Ministry of Justice’s consultation paper on the claims process, which is proposing fixed costs for liability-admitted, fast-track cases. The paper says: ‘The fixed costs will be calculated to reflect only the work needed to be done to comply with the new process. They will not include the cost of referral fees.’



Mr Bermingham says: ‘Those cases make up the vast majority of work, so it won’t matter what rules there are governing referral fees if the level of the fixed fees make paying them uneconomic.’



The Association of Personal Injury Lawyers’ (APIL) view is that referral fees are a necessary part of marketing and should be seen as marketing costs. President Martin Bare says: ‘They have never been recoverable between the parties and are a separate overhead, as are advertising costs. If, however, any fixed fee is set too low, it will not be financially viable to have referral fees because solicitors will not have the funds to pay for them.’



In the meantime, APIL wants to meet with the Law Society to discuss strengthening the rules governing referral fees. Mr Bare, a partner with Leeds-based trade union firm Morrish & Co, says: ‘Our members are concerned about the lack of transparency and they want to see proper enforcement. There should be one set of rules that apply to all those involved that are clear and transparent, and drafted with the victim in mind. No more calling them administration or exit fees.’



He says APIL never wanted the ban to be removed. ‘But it became pretty clear that the ban wasn’t working and that its removal could be in the public interest. Consumers were losing out because there was no transparency and no consistency – instead you had something which was chaotic. The only way to bring order was to lift the ban.



‘I think members now accept that they are a market reality. I don’t see how you could get the genie back in the bottle.’



Part of the problem with referral fees has been the perception that, while it is generally accepted that other professions pay commissions, the idea of solicitors paying for work sits uneasily with their independence.



Bryn Hughes, marketing director of Salisbury and Southampton firm Trethowans, found out last year just how strongly the media and public feel about referral fees, when his firm offered to pay local businesses which referred clients to its family law team £75 if the case proceeded.



When the media storm broke – misreporting suggested that the firm was asking hairdressers to inform on their clients – Trethowans immediately stopped the scheme.



Mr Hughes says: ‘The person who complained had misunderstood the scheme but it was the right thing to do to stop it. Referral fees are widely accepted in areas such as residential conveyancing – we have a scheme in place for that, although we don’t for personal injury because we get enough work through other sources.



‘However, in areas such as family law, people are more sensitive. But we are on the point of major change with deregulation, so anyone will be able to offer legal services. Competition will be rife and so, in order to survive, we are going to have to think differently and be a bit more cut-throat.’



Karen Mackay, chief executive of the family lawyers’ organisation Resolution, says it is ‘difficult to market family breakdown’. They have not taken a particular line on referral fees and, instead, left it to individual members. ‘No one has raised it as an issue with us, but that’s probably because there isn’t an obvious source of referrals.’



In the sporting world, ‘bungs’ are the stuff of legends and it is a sign of how far referral fees are spreading that it is said that some football agents now expect to receive them before recommending a solicitor to their glamorous clients. However, for well-known solicitor and football agent Mel Goldberg, chairman of the British Association of Sport and Law, there is nothing wrong with referral fees as long as the client knows about them.



‘I wouldn’t say it is standard practice, but it is creeping in,’ he says. ‘I am talking mainly about lawyers recommending other lawyers where they may agree a fee for introducing new business. I don’t have a problem with that, as long as the client knows what is involved.



‘With football agents, if someone is providing a service and introducing quality work, I don’t see referral fees are a problem, as long as the client is kept informed. The key is the client doesn’t end up with inferior service.’



The question for the SRA is: will better disclosure and tougher enforcement change the image of referral fees? As Mr Hughes says: ‘Everybody forgets that lawyers need to market and that work doesn’t just come in through the door. People don’t want stuffy lawyers, but they don’t want them being too proactive either.’



Grania Langdon-Down is a freelance journalist