The Legal Services Board has dropped plans to force law firms to publish their referral fee arrangements on their websites, in its final decision on the regulation of referral fees published today.
The LSB said it would no longer seek to prescribe the precise measures that law firms and others must take to achieve greater transparency over referral arrangements.
Instead, it has set out what frontline regulators such as the Solicitors Regulation Authority must achieve by 2013, but it will give the regulators freedom to decide themselves what measures they want to impose on firms to reach this position.
It will still be open to the SRA to oblige firms to publish referral arrangements if it chooses to do so.
The LSB said that by 2013, frontline regulators will need to have ensured ‘that consumers know when referral fees are in operation and to whom they are being paid’.
They will also need to have ‘improved regulatory policing of lawyers’ obligations’.
The LSB’s final decision follows a consultation published in December last year.
After a lengthy investigation by the LSB’s Legal Services Consumer Panel, the board concluded that there was not enough evidence for an outright ban on referral fees, but there was a need for greater transparency over the arrangements in place.
The December consultation proposed specific measures to be imposed on firms to make referral arrangements more open, such as obliging them to publish details of referral fees on their website.
An LSB spokesman said the board had listened to feedback that, as an overarching regulator, it should not lay down these specific measures, but should give frontline regulators greater freedom in how to achieve the outcomes set out by the LSB.
LSB chair David Edmonds said: ‘Before this exercise, the debate on referral fees was characterised by high passions but a lack of hard evidence.
'Following this detailed investigation, we are persuaded that the interests of consumers are best served bycontinuing to permit referral fees, but managing their impact through shining the light of transparency on them.
‘We have set out a range of measures that can help achieve this – with the approved regulators free to choose what is best suited to their part of the market.
'Whilst they will have the flexibility to tailor action, securing these outcomes is essential and we will track progress carefully over the coming months.’
Dianne Hayter, chair of the Legal Services Consumer Panel, said: ‘I am pleased that the LSB is insisting on greater transparency, tighter enforcement and more joined-up regulation of referral fees - these were the panel's key recommendations for cleaning up the market when we examined this issue last year.
‘Lawyers and their introducers should be clear that maintaining the status quo is not good enough.
'Our research showed the public is prepared to tolerate referral fees, but only if they take place in the open.
‘Therefore, the panel's support for referral fees remains conditional on achieving a more transparent market that works in the consumer interest.’
Law Society president Linda Lee said the LSB should have introduced a ban on referral fees.
She said: 'The LSB has picked the wrong target by taking steps that will increase the burden and cost of regulation.
'We asked the LSB to look into the issue and emphasised that a prohibition was needed to reduce pressure on legal costs and to avoid cases being bought and sold, because we consider this practice not to be in the public interest, whatever economic studies may say.
'Instead, the LSB has chosen a path which will involve yet more complex regulation of solicitors rather than tackling the middleman charging referral fees.
'This is a mistaken decision by the LSB, which has failed to act in the public interest. Its decision will only help those who wish to make money out of consumers but who add no value.'
She added: 'At a time when the government is seeking to reduce the costs of litigation and the legal process, it is surprising that this is being frustrated by the LSB.
'The LSB cannot see that it is simply wrong for cases to be bought and sold in this way. This fact was recognised both by Lord Justice Jackson and by Lord Young in their reports.
'The Law Society remains severely critical of the evidence that the LSB has relied upon, much of which was based upon the views of those who demand referral fees and so had a vested interest in the outcome.
'We are also disappointed that, even if it thought that it was wrong to prohibit payment of referral fees altogether, the LSB did not take up the Law Society’s view that those who insist on payment of referral fees ought to be regulated.
'It is impossible for solicitors to oversee the way in which people over whom they have no control carry out their responsibilities.'
The Law Society is writing to Justice Secretary Kenneth Clarke urging him to address the issue.