With the law society set to review the relaxation of the rules for referral fees, the issue is as contentious as ever. Grania Langdon-Down hears the arguments for and against
While one firm of solicitors has come up with the idea of offering estate agents who refer clients to them a raffle ticket – first prize an expenses-paid holiday – others say that referral fees will lead to the destruction of the English legal system.
For the past ten months, solicitors have been permitted to pay referral fees, provided they explain the situation to clients and the arrangement does not compromise the independence of their advice to clients. Solicitors are also prohibited from paying referral fees to people who have found clients through cold calling.
The Law Society is to review how the relaxation of the ban has worked in practice in its first year, as required by the Master of the Rolls, Lord Phillips of Worth Matravers, when he approved the move last March.
The review will include information from solicitors and clients, as well as regulatory information arising out of complaints, questions to the ethics helpline and visits by the practice standards unit. The results will go first to the standards board and then to the full council in May for a vote on whether the rule should remain as it is now, whether it should be modified, or whether the original ban should be reinstated.
Leading claimant lawyer Kerry Underwood, senior partner of Hertfordshire firm Underwoods, does not pull his punches: ‘My view remains that the ability to pay referral fees will lead to the destruction of the English legal profession. At the moment, referral fees are regarded as a cottage industry, whereby high street law firms pay for personal injury and conveyancing referrals. However, they are paying too much for cases which is biting into profits.
‘But, if the lifting of the ban stays, cases will become commodities to an even greater extent and the big players – the banks and the insurance companies – will come in and buy up all the profitable work and sub it out to solicitors. That will allow non-lawyers to control the flow of work.
‘However you dress it up, the people who control the work are the masters. We saw that with The Accident Group and Claims Direct – firms became dependent on them and when the company said jump, the answer was “how high?” This is not the way to have an independent legal profession.’
Mr Underwood makes his case for the ban to be reinstated – as long as it is rigorously enforced – even though his firm stands to benefit from its relaxation. Speaking now as senior partner of Underwoods South Africa and as chief executive of Law Abroad, also based in South Africa, he says it will be ‘fantastic’ news for his new ventures because he predicts that those big players buying up cases will choose to ‘offshore’ the work to get the best possible price.
The relaxation of the ban has certainly proved controversial. Those arguing in favour claim that the old rule was widely flouted and difficult to police; it put solicitors at a disadvantage because other providers of legal services could pay referral fees, while the Office of Fair Trading argued that it was probably a breach of competition law.
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However, practitioners voted three to one against it in a postal ballot last year (on a 17% turnout), arguing that it was not in the public interest and would undermine public confidence in the profession.
But, despite the size of the response, Russell Wallman, the Law Society’s director of strategic policy, says the ballot will not have any significant impact on the review itself. ‘The decision has to be made on regulatory arguments and not just on expressions of what the profession wants. The council is legally obliged when dealing with rule-making to act not in the interests of the profession but in its conception of the interests of the public.’
This highlights the problem with the Law Society’s current dual role in both representing and regulating solicitors, he says. ‘It complicates matters because Sir David Clementi [in his report last month on the regulation of legal services] says the council is not appropriately constituted to be a regulatory body and yet it has the last word on regulation. The difficulty with this issue is that there isn’t an obvious right or wrong answer from a regulatory perspective.
‘I think you start from the proposition that unless there is a clear public interest in prohibiting methods of getting business – such as cold calling – then markets work best without restrictions.’
Paul Higgins, principal of Higgins & Co in Birkenhead, provoked a storm of protest last year when he wrote to 600 GP practices offering doctors £175 for each patient referred to him. The media accused him of fuelling the so-called compensation culture, the British Medical Association condemned it as ‘highly questionable on ethical grounds’, while ministers criticised it in Parliament.
The Law Society took the view that while solicitors should not solicit work from people for whom the proposal would be professionally improper, it was far from clear that this was the case for doctors. Mr Wallman says: ‘Most of us had the same instinctive unease at the situation, but it is quite difficult to see what the mischief is.’
Mr Higgins says: ‘It is the behaviour of the claims farmers and the accident management companies that has caused solicitors' stock to fall to an all-time low.
‘I have no regrets about what I did, although it was most unnerving to be the subject of such intense media scrutiny. I am half minded to do it again but this time I will say that I will pay the referral fee only if the doctor gives me an assurance that he will explain the situation to the patient and will spend the fee on patients’ well-being or pay it to a charity of their choice.
'I never expected doctors to take such a holier-than-thou attitude. I felt it was an opportunity for professionals to work together to help patients get access to justice.’
He did not vote in the postal ballot. ‘I have an open mind about it. On balance, I think referral fees should be allowed because how do you police a rule that is unworkable? But if they stay, it will be the death-knell of a lot of firms which are walking a tightrope over whether they pay the fees and get work – and risk paying so much in fees they can’t make ends meet – or don’t pay them and get left behind.’
The Association of Personal Injury Lawyers (APIL) did not want the ban removed but it has now ‘reluctantly’ dropped its opposition. President Colin Ettinger, head of personal injury at Irwin Mitchell’s London office, says: ‘If you are going to have referral fees, the rule as it stands is not bad.
‘I don’t engage in them but I hear that trade unions, for example, have cottoned on to the fact that referral fees are now legitimate and are offering deals to lawyers. There are so many arrangements in place now it would be difficult to turn the tide back.’
The debates in the Law Society Council that preceded the change to allow referral fees were marked by sharp divisions between personal injury lawyers – who viewed it as a necessary evil to level the playing field with claims farmers – and conveyancers, who saw little point to them in their market, and perhaps envisaged their already thin margins being wiped out by estate agents demanding referral fees.
Denis Cameron, senior partner of Cameron & Ball in Blackpool and chairman of the Law Society’s conveyancing and land law committee, is pressing for conveyancing to be ‘carved out’ of the current rule. ‘Personal injury or medical negligence isn’t a finite market, so there is perhaps a purpose in paying referral fees to people who can find the clients who need a solicitor.
‘Conveyancing is completely different. All referral fees do is push work from firm A to firm B and either income is sucked out of the profession or people will find ingenious ways of making members of the public pay the fees. The other mischief is that the person who is doing the referring and is being paid the fee has a direct interest in the result of the matter referred, which places the solicitor in an awkward position.
‘I would like to pull conveyancing work out of the issue by having a rule that says you cannot pay a referral fee to a third party who has a financial interest in the matter referred. I am torn because in my heart I would prefer not to have referral fees, but common sense says this half-way option is the way forward.’
One argument for relaxing the ban was that it was difficult to police. Tim Readman, a sole practitioner based near Plymouth, says: ‘It seems to me it was not the difficulty of enforcement that was the problem but the lack of will to do it.’
Mr Wallman says it is difficult to assess how widely the rule was breached. ‘For a substantial period prior to the change in the rules, we only took action in flagrant cases because there was considerable uncertainty about its interpretation. One of the purposes of the change is to make sure it is clear and applied consistently.’
However, Mr Readman is not to be swayed. As the Law Society Council member for sole practitioners, he put forward a motion at last month’s council meeting calling for a return of the ban, which was defeated by 57 votes to 25. But he pledges: ‘I don’t think the issue is dead. We fight on.’
Grania Langdon-Down is a freelance journalist
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