The Law Society Regulation Board was this week considering the future regulation of referral fees after an investigation by its practice standards unit found 'significant evidence' of breaches of the rules.


Common breaches unearthed by the PSU during visits to 135 law firms included: a complete lack of disclosure of the referral fee arrangement (34% of firms systematically in breach); inadequate disclosure (17%); a failure to obtain an undertaking from the introducer to comply with the introduction and referral code (47%); and a failure of solicitors to ensure that introducers are complying with the code (61%).



The visits - carried out between February and May 2006 - looked at compliance with the code, but did not look at the quality of advice given and whether or not this had been compromised by the arrangement. The research found that the majority of referral arrangements are local, rather than regional or national.



The board was considering the findings at a meeting this week. Possible courses of action available to it include issuing further guidance to consumers and solicitors, taking tougher enforcement action, or undertaking a full review of the rules.



However, an internal report prepared ahead of the meeting argued that a full review was not justified, and instead called for limited, further research into the causes of non-compliance. It said the evidence from the unit is 'largely inconclusive in terms of determining the extent to which public harm is caused by the failure to comply'.



Board chairman Peter Williamson said: 'Finding the right balance between liberalising markets and protecting clients is a difficult regulatory issue. The key principle must be to ensure clients have the knowledge to make informed choices, and the confidence that their solicitor will put their interests first.' Describing the breaches as 'unacceptable', he added: 'What is already clear is that there is a real problem which needs prompt action by the board.'



However, Desmond Hudson, Law Society chief executive for representation, said: 'The Law Society has pressed the Regulation Board to carry out a full scale review of the present arrangements. Developments since referral fees were permitted cast serious doubts on whether they operate in the public interest.'



The ban on referral fees was lifted in March 2004. In July 2005, the Law Society Council referred the issue to the Regulation Board after it split its regulatory and representative roles.



Philip Hoult