Is the referral fee debate over? Two reports submitted recently to the Legal Services Board (LSB) would make one think that it is, even though the board itself has still to reach a final decision.

First came an economic impact analysis, commissioned from Charles River Associates (CRA), which found that not only do referral fees in personal injury (PI) and conveyancing not harm consumers, but they actually result in cheaper conveyancing fees and improved access to justice for injured people. It said there was no case to ban them or take any other regulatory action.

The analysis said that, in PI, success rates in motor claims have not declined, while there was no evidence of solicitors under-settling claims because of the pressure of lower margins. Contrary to the claims of the insurance industry, CRA said there was also no evidence that increases in referral fees have led to an increase in the price of legal services.

Though insurance premiums have probably increased, it said, this was partly offset by the referral fees that insurers themselves receive. In any case, it was ‘difficult to describe this as detriment’ as the rises were caused by consumers exercising their right to bring a claim. Researcher Kyla Malcolm told an LSB press briefing that ‘consumer evidence has supported the link between marketing and making additional claims which would not otherwise have arisen’.

The study reviewed existing research and also carried out empirical interviews with 42 stakeholders and a survey of estate agents.

Panel gamesTwo weeks later came the much-anticipated report of the Legal Services Consumer Panel, which has spent some months on this, its first project, gathering evidence and talking to consumers. The conclusion was that referral fees should not be banned – although the LSB should review the market again in three years’ time – but that there should be greater disclosure and more stringent regulation. In PI this could include a ban on auctions for work.

The panel also called for referral fees to be openly factored into the calculation of fixed-fee regimes and the guideline hourly rates as ‘business acquisition costs’. It will also return in future to the question of choice of solicitor, having noted the situation in relation to legal expenses insurance.

The panel did identify several areas of concern and said it ‘has its reservations about referral arrangements’. But it also found no evidence that referral fees increase legal costs or reduce the quality of work, or that lawyers provide biased advice in order not to lose work from introducers.

In PI, the panel said claims management companies and not-for-profit bodies have helped more people to achieve redress and increased access to justice without fuelling a ‘compensation culture’. It explained: ‘Insurers settle over 90% of road traffic accident claims, suggesting that excessive or fraudulent claims are rare.’ The Advisory Committee on Civil Costs told the panel that its own investigation into the impact of referral fees on the guideline hourly rates concluded that claims management companies are not making excessive profits. This is the first word of this long-awaited report, but at the time of writing the committee had still not had permission from the Ministry of Justice to publish it in full.

Focus groups commissioned by the panel uncovered widespread ignorance of and discomfort with the existence of referral fees. However, the researchers, Vanilla Research, described the ‘promise of transparency’ over arrangements as a ‘game-changer’ by addressing consumer concerns around charges, suitability of lawyer and freedom of choice.

In PI, the panel highlighted two particular problems: closed bids and auctions mean that work is referred to lawyers paying the highest referral fees, not the best quality lawyers; and competition concerns raised by the trend for introducers to refer work to a small number of large law firms.

Shocked consumersDeciding that referral fees nonetheless have a place in the market, the panel made 12 recommendations, including action to ‘replace the current hotchpotch of rules with a consistent set of regulatory arrangements for lawyers and introducers’; improved transparency requirements; and mystery shopping and enforcement action to tackle breaches of transparency rules.

It also said regulators should issue guidance on the circumstances under which a dependency on referral arrangements creates a risk of conflict, and that the Office of Fair Trading should consider investigating whether competition in relation to introducer panels is working effectively.

Though in relation to conveyancing, the panel said consideration should be given to clients having to give their written consent to being referred for a fee, chairwoman Dr Dianne Hayter said this would not be practical in PI cases because so much of the upfront work takes place over the telephone.

She added: ‘Consumers are surprised, even shocked, that lawyers pay referral fees, but they are willing to tolerate this so long as such transactions are conducted in the open. Greater transparency, combined with tough action against rule-breakers, is needed to ensure that referral fees work in the interests of consumers.’

Measured approachThe panel has no authority, but its report will be fed into the LSB’s ongoing process of deciding whether it should take any action on referral fees. Hayter said she would expect the board to heed the report’s findings.

The LSB is taking a measured approach to deciding the way forward on referral fees, but it is hard to see, in the light of what it has been told so far, how it could now decide that such a radical action as returning to the ban is justified, even though the consumer panel report in particular does identify plenty of poor practices and consumer disquiet with referral fees. The board should make its views known in the next couple of months. It could decide simply that further investigation is required, which by perpetuating uncertainty would arguably be the worst of all worlds.

The article appears in the June edition of Litigation Funding, a bi-monthly Gazette publication available from the Law Society. For subscription details, call 020 7841 5523