The referral ban is now in force and there are hundreds of firms of solicitors looking for a way forward. Recently, the Solicitors Regulation Authority provided further guidance which it said would help. It doesn't. There is nothing new in it. It will not pre-approve any arrangement and even if you ring the ethics helpline and someone says your arrangement should be ok, they can still decide that in fact it is not; and the advice you were given will be no defence. It can say your agreement appears to involve paying a referral fee and you have to prove it doesn't. There are things you need to be aware of so you can decide what to do.
You can stay away from conflict or you can decide to take them on, the tools exist with which to challenge the whole approach. There is always the risk that they may come for you, even if you have not entered into any new arrangement (we are not using this word in the statutory sense but loosely to refer to any marketing agreement where you are not advertising directly) they may ask you what your plans are to obtain business and remain financially viable in the light of your present business plan and model.
The SRA, in its formal consultation document make it clear that they hold information indicating that some firms are particularly reliant upon referrals and they may be asked about their future plans in terms of the risk to regulatory objectives. Many if not most firms do not have any plans in place as yet. Quite understandably, firms are still struggling with the regulatory changes and the requirements in terms of appointing compliance officers and the duties of such officers, and their relationship to the firm and its employees. They now have to deal with the rug being pulled out from under them.
There is an urgent need for clear guidance to be given to hundreds if not thousands of legitimate businesses standing on the brink of ruin. To be worth anything the guidance should have come from the SRA. It is clear that that is not going to happen - what it has said about this to date is as clear as mud; the only thing that has become apparent is that the regulator’s thinking and approach is inconsistent, illogical and ill-considered.
Perhaps we should start with something entirely practical which may be worrying some people. We have heard it said that come the commencement date those firms who have prepaid for cases will not be entitled to receive them. This is nonsense. The ban is on referral fees, not referrals. Any existing contracts between law firms and referral companies have not become illegal or unenforceable. You are entitled to receive the referrals or your money back; good luck with that.
Going back to the SRA and the question of guidance, in its document Open consultations: the ban on referral fees in personal injury cases, (23 of October 2012). It recognised that ‘there was scope for interpreting the provisions in LASPO in different ways and that there is some lack of clarity about which practices and business models which might be affected by the ban, particularly in relation to issues such as "pooled marketing resources" and payment for services’.
Its response to those who urged clear guidance in the light of that recognition was to say: ‘Regulated persons should be able to determine from LASPO itself the arrangements which will be prohibited and the risks associated with entering into referral arrangements. The SRA does not intend to provide regulated persons with pre-approval of business models.’ Why not? Is it because they are still not quite decided just what they should be doing?
The SRA said: ‘Making the prohibition wider than required by the act [LASPO] would, in the absence of evidence of public detriment sufficient to make such a regulatory intervention, be precipitate. Adopting a narrower approach would be unlikely to comply with our obligations under LAPSO.’ Fair enough! It wouldn't be fair to be more restrictive than required by the act and they wouldn't be doing their job if they were less restrictive or less strict than required by the act. This is from the SRA’s later formal consultation, proposals and draft strategy but just a few pages later, amazingly, it says its definition of a referral will be: ‘Referrals includes any situation in which another person, business or organisation introduces or refers a client to your business, recommends your business to a client or otherwise puts you and a client in touch with each other.’
That which would be precipitate is now an acceptable matter of fact. It says that there will be some ‘some arrangements that, whilst not breaching the LASPO provisions, will still be considered a referral for the purposes of the code of conduct and will still be subject to the relevant outcomes’. This is important. The SRA definition of referral is wider than the definition in the act. The purpose, as they frankly say, being to enable them to outlaw a wider range of arrangements.
Now; how are we supposed to ‘determine from LASPO itself the arrangements which will be prohibited’ when the SRA intends to go beyond the statute and use a different definition of the very thing that is banned? This definition is the same as the one in chapter 14, Interpretation, in relation to the old code as to what sort conduct was acceptable in entering into referral arrangements. This definition was available to parliament but not used, as it would have banned all and every sort of marketing, which the government was keen to say it did not intend to do.
You have probably received either emails or letters from marketing companies claiming or indeed guaranteeing compliance and offering a number of personal injury leads at a certain price with money back or replacement, very close to the referral arrangements most firms had with claims management companies. We simply warn that given the above you can expect conflict over these sort of schemes with the SRA. We do not say that these firms are wrong to claim compliance. The idea seems to be that they arrange for the clients to contact you directly and provide their own details; so that under the act there is no referral.
A referral is defined in the act as:Section 56. (5) There is a referral of prescribed legal business if;(a) a person provides information to another;(b) it is information that a provider of legal services would need to make an offer to the client to provide relevant services; and(c) the person providing the information is not the client.
This should mean that there is no referral where the client gets in touch and provides his own details. However the SRA definition ‘includes any situation in which another person, business or organisation introduces or refers a client to your business, recommends your business to a client or otherwise puts you and a client in touch with each other’.
This is wide enough to catch a situation where a client responds to an advert in a newspaper. The newspaper has put you and your client in touch. We are certain the SRA does not intend to penalise every form of marketing but their definition does cover every sort of marketing. By now it should be clear that we have two sorts of ban on referral fees! A statutory ban and a regulatory ban.
How is this justified? The act requires the regulator to ensure it has arrangements in place for monitoring and enforcing the restrictions placed on regulated persons under sections 56 and 57 of the act, and it also allows them to treat any breach as it would the breach of any other regulatory requirement and to have the same powers available in relation to any breach of these LAPSO provisions.
Section 57 subsection 7, provides: ‘Subsection (8) applies in a case where - (a) a referral of prescribed legal business has been made by or to a regulated person, or (b) a regulated person has made an arrangement as mentioned in section 56(2)(a), and it appears to the regulator that a payment made to or by the regulated person may be a payment for the referral or making the arrangement (a "referral fee") ‘8. Rules under subsection (2) may provide for the payment to be treated as a referral fee unless the regulated person shows that the payment was made - (a) as consideration for the provision of services, or(b) for another reason, and not as a referral fee.’
Nothing here justifies a wider definition of ‘referral fee’, it only enables them to treat as a referral fee any payment made for a referral, where it is claimed that the payment is not for the referral but for other services provided in addition to and incidental to the referral. So where a firm has a deal with a company which provides it with referrals and also vets the claim and takes a brief statement and the firm claims the payments are not for the referrals but for the vetting and taking of the statements, the SRA may treat the payments as being for the referrals and not the incidental or other services, unless the firm can show that to be incorrect.
In other words the burden of proof is reversed so that where there has been a referral to or by a regulated person any fee paid by or to that person will be presumed to be for the referral. But there still has to be a referral. That does not justify using a wider definition of a ‘referral’.
The SRA does not appear to have realised that there is a difference between making regulations and enforcing a statutory provision. Where it is making regulations it can adopt such definitions as it pleases but when it is being asked to police a statutory ban, then it can only police the ban as it exists in the statute. It cannot decide to enforce whatever it pleases.
Its reason for adopting the wider definition is: ‘This is because we believe that our wider definition provides important consumer protection by ensuring transparency, and the primacy of the client's interest, in relation to a wider range of arrangements. For example, we consider it important that where a third party recommends a particular firm, the client is aware of any financial arrangement and can make an informed decision about the recommendation.’
The need to enforce the ban arises as a result of a government decision to ban referrals for reasons which are extremely questionable, based on conjecture and speculation. The enforcement of the act is not a regulatory matter, there is no element of consumer protection involved. Insurance companies who are the real force behind this ban, are not even consumers of the services. The rules were very clear about transparency in relation to information about the payment of referral fees. Anyone who thinks that ordinary people are under the impression that people who advertise on behalf of solicitors are ‘recommending’ them are living on another planet. No one thought that claims management companies (CMCs) were ‘recommending’ the solicitors to whom their claims were passed on.
The SRA is patently making up a reason which just doesn't wash. It would not have introduced a regulatory ban if left to its own devices. The reason for doing so is that it would be impossible to police the ban if the statutory definition stands alone. All CMCs had to do was to pass the phone to the client and ask them give their own details to the solicitor. No referral took place.
It may help to remember that the government was considering making any breach of the ban a criminal offence and the reason for not doing this was the difficulty of defining a referral fee in such a way as to ensure conviction beyond reasonable doubt. In other words for a criminal offence there would have to be some precision in the language and concepts used. The criminal courts would not be an efficient way of stopping solicitors in their tracks and taking money away from them, maybe even putting them out of business. You could not introduce a presumption of guilt into a criminal statute either as that would be contrary to the European Conviction on Human Rights. There was strong pressure from Jack Straw to make the ban criminal but the government wouldn't budge for the reasons given.
The government has made the SRA the prosecution and the the judges in the same cause and sanctioned bias on their part. The SRA does not seem to have appreciated this, they should,in an attempt to introduce some fairness in the proceedings, at the very least refuse to use section.57(7) and (8).
As to whether, despite what the act itself says, the ban is still criminal in law, see the House of Lords decision in Clingham v Royal Borough of Kensington, and Chelsea and R v Manchester Crown Court, ex parte McCann and Others, 17 October 2002. Also the Irish case of John Gilligan and The Criminal Assets Bureau, Barry Galvin, The Revenue Commissioners, Revenue Sheriff Frank Lanigan, The Garda Commissioner, Ireland And The Attorney General, as to a general discussion on the indicators of criminal prohibition whatever the internal classification might be.
For an example of how the European court approaches issues of the right to a fair trial in both civil and criminal cases and the presumption of innocence see the case of Hraldo v Croatia (Application no. 23272/07) 27 September 2011. Though there are of course lots of other and probably better examples.
The SRA will run into problems in all these respects when the courts eventually come to consider these issues. This is not a case of private rights of individuals but a ban on conduct by the state, and transgression is subject to penalties which are serious.
When we telephoned the ethics helpline (0870 606 2577) to seek clarification we were told to remember that there was a difference between the statutory ban and the regulatory provisions and that we could still be in breach of regulations even though we were not in breach of LASPO. We asked specifically what the rights and wrongs would be of entering into an agreement whereby a marketing company or accident CMC offered an agreement whereby they would acquire potential claims and get the clients to speak to us and provide their details, rather than they themselves providing the details and we would pay per claim or a number of claims or potential claims (a scenario they avoid in their examples given so far). Since there was no referral under LASPO would that be acceptable?
We were told that that might be ok but it could be that it would consider that an attempt to get round the ban and it might use itd definition of referral and invite us to prove that there was no referral fee being paid. We would not be in breach of the statutory ban but would be in breach of the regulatory ban. Rather worryingly we were invited to put our proposed agreement into writing and submit it for consideration in order to enable them to fine tune their approach. It still does not appear to know what it is going to do.
The SRA has a dilemma, whether to say the ban is penal in nature and that they will enforce it accordingly; for example strictly as defined in the statute, making it meaningless, or whether to try to make the ban meaningful by adopting a wider definition of referral. This seems to be the regulator's chosen approach. However, that also means that no one can know what the ban means. No one can predict what is or is not acceptable. Doesn't there need to be some certainty to the law so that we can try and avoid breaking it? Apparently not.
The only thing to do is to put as many layers of protection between you and a perceived breach as is possible. Make sure any arrangement relies on clients passing on details and not a third party. Make sure you are not paying per claim or claimant. You must appear to be assuming some risk as to what the marketing will produce. This, we think will have to be the key to how the SRA will operate. In other words is the risk of what the marketing will produce on you or the marketing company. If it is the marketing company then obviously you are guaranteed a number of cases per an amount of money and therefore getting referrals.
If the risk is yours, then there is no guarantee of how many cases you will get and you are not getting referrals. Of course that can't ever be as clear cut as anyone would like. How do solicitors measure the efficacy of any marketing campaign? By seeing how many cases it produces. So why, in a commercially realistic world, should they not relate cost to the number of cases produced?
The approach we would recommend is one of caution - use a bit of subtlety until those with deep pockets test the legality of the SRA's adoption of the wider definition or, if you prefer, their ‘regulatory ban’. Just don't hold your breath. Everyone should do an immediate risk assessment about their financial position and put a new business plan in place as to advertising, the cost thereof and the number of cases it is hoped will be generated and the income to be gained. Quickstep or salsa, take your pick.
Sukhbir Bassra is a barrister at No.6 Barristers, Leeds and Amarveer Bassra is a partner at ASB Solicitors