The government’s announcement that it would prohibit referral fees may have caused initial joy among the many ­supporters of the Society’s policy that such fees should be banned. But a closer look at the amendments to the Legal Aid, Sentencing and Punishment of Offenders Bill (LASPO) to achieve this policy may well have wiped the smile from a number of faces.

Many solicitors will agree that there is something distasteful about referral fees, at least in the form that they take in the conveyancing and personal injury worlds. It seems wrong for insurers and claims-handlers to sell claims to the highest bidder, rather than referring them to the most appropriate solicitor for the client. There is a real potential for consumer detriment here.

While many of the solicitors are likely to be entirely ­competent to undertake the work, the lack of client choice and the pressure on the client seem ethically wrong. There may also be concerns that the amounts anecdotally paid for referrals (there is little hard evidence) may leave little to pay for the work that needs to be done on the case.

Many of these concerns were shared by Lord Justice Jackson, though he also felt that they inflated fees (see below for why he was wrong). Support also came, more surprisingly, from the insurance industry, many of whose members had been using such fees either to bolster their profits or reduce premiums, and from Jack Straw who, despite having the matter drawn to his attention by the Society while in office, seems only to have been ­converted to the cause in opposition.

So, without consulting the profession in any detail, the government tabled amendments to LASPO to ­prohibit the payment of such fees in personal injury (PI) cases. They will have the following effect:This will clearly outlaw solicitors paying claims-handlers for cases, but it will also mean:

  • Any outsourced advertising involving payment by results - even if it is only passing on a name and address - will be outlawed, and this could extend to an outsourced telephone answering service where payment is linked to the volume of calls;
  • Consortia arrangements whereby solicitors share marketing costs will be illegal;
  • Referrals between solicitors (for example because they have a professional duty to pass the case to someone else or because it is more convenient to the client) will be prohibited;
  • Arrangements whereby solicitors offer pro bono advice to employees or members of an organisation in one area of law in exchange for referrals of work in another will be outlawed also;
  • The costs of enforcing this will fall on the profession.

  • Arrangements whereby one party pays another consideration for ­information that they would need in order to bring a claim for PI on the part of a client are unlawful;
  • Regulators, such as the SRA and FSA, will be required to enforce the rules;
  • The lord chancellor will have powers to make regulations about services where there might be thought to be a referral element.

Essentially, the only marketing for PI claims that can be undertaken by firms in respect of personal injury work will be traditional, self-commissioned advertising with no payment by results. It is hard to think of any other competitive industry subject to these limitations.

It is also no secret that a substantial concern about referral fees arises in the conveyancing market - the bulk of the letters on the subject received by the Society are from conveyancers. These provisions do not apply to conveyancing work. Indeed, a number of conveyancers, even those opposed to referral fees, may be glad that they do not. However, this is a further worrying sign that the bill will not meet our concerns.

In fact, the government does not see any ethical problem with referral fees. What it thinks is that they encourage frivolous claims - though why solicitors should pay for bad claims is not explained (unless insurers cave in to every claim form, meritorious or not, in which case you might think there was a different solution to the problem). So this amendment becomes part of the agenda of LASPO - to reduce the number of claims, whether good or bad, in the system and reduce access to justice.

In fact this will not work. The major claims-handlers and insurers will enter into ABS arrangements with law firms and, in effect, internalise the referral fees that they are currently receiving. The marketing spend to obtain claims will be unchanged and the number of claims will not decline. Meanwhile, firms that currently pay referral fees will not, unless they take a similar route, be able to compete and will not be able to go into consortia. The result is likely to be a decline in the number of firms undertaking PI work and reduced client choice. In addition, ­perfectly legitimate and even laudable activities will be banned. There is less incentive for a solicitor to pass work on to a colleague who may be more suitable for the client and payment for the work is a long-established, perfectly respectable practice.

Furthermore, the idea, supported by Jackson LJ, that referral fees increase the costs of cases needs to be firmly squashed. The fixed costs for PI work have not risen since the Law Society relaxed the ban. In fact, those associated with the Road Traffic Accident portal have fallen. Referral fees are a form of marketing, and money that is not spent on paying for referrals will need to be spent on whatever other forms of advertising are permitted when the bill becomes law. Certainly, the Society could not countenance any reduction of fixed fees on the back of these amendments - that would penalise the 50% of firms undertaking personal injury work who do not pay for referrals.

So we have here a change in the law that, while it may well stop referral fees in their current form, will also make illegal perfectly legitimate and even valuable activity by the profession.

It will also be expensive to enforce and the SRA has substantial reservations about the appropriateness of this clause. If the SRA is saying this, ­government should listen.

The Society’s policy on referral fees remains unchanged, but this is the wrong way to achieve that result. We have made proposals intended to achieve the aim of abolishing referral fees but without the unintended ­consequences of the present ­amendments. We will pursue these in parliament. These proposals are aimed at the wrong target. Government should abandon them and start again.

Mark Stobbs is director of legal policy at the Law Society