Paying the piper

The ban on paying referral fees is honoured more in the breach than the observance.

So what should be done? asks Mark Smulian

It is sometimes said that a law that cannot be enforced is a bad law.

Like cab drivers who fail to keep hay in their vehicle's boot, or people who listen to pirate radio stations, solicitors who pay referral fees cannot see why they should be held in breach of a Law Society rule.

To some at least, paying these fees is a matter of staying in business or not.

The Society's ruling council is scheduled to revisit the issue in December, and consider options on what to do about the rule that bars solicitors from paying fees to have clients referred, usually from insurers or estate agents.

The standards board has already decided that a compromise of retaining the ban on referral fees, while exempting marketing schemes, was unworkable.

The council voted narrowly in March to retain the ban because it felt it did not have enough information.

December's meeting is likely to be given the options of imposing a complete ban on payments for referrals, or of scrapping this provision and replacing it with a rule that would require solicitors to tell clients about any payments they have made.

Solicitors would also have to avoid entering any arrangement that would damage their independence.

Referral fees have been reviewed several times in the 15 years or so since the restriction on advertising by solicitors was lifted, but without any conclusion being reached.

Alison Crawley, the society's head of professional ethics, admits: 'There have been no recent actions against solicitors for breaching this rule, and I cannot remember any.

It has been under review for so long it would be difficult.'

Part of the problem is that clients do not make complaints about these payments because they are unaware of them.

Most complaints come from solicitors who accuse other solicitors of breaking the rule.

A complaint from a member of the public that solicitor X was improperly in cahoots with estate agent Y could be investigated.

But it has proved difficult to get evidence in cases raised by solicitors themselves, not least because the firm complained against can argue that it cannot breach client confidentiality to allow the matter to be fully investigated.

One source said: 'Half the solicitors concerned are being paid in breach of the rule, and the other half think they will be forced to pay for work they do not pay for at the moment.'

A major problem is that the current rule was formulated in the mid-1980s, when no one foresaw the growth of business in indirect referrals.

People who run businesses based on finding solicitors to do work for their clients expect to be paid, as do Internet referral services.

The source pointed out: 'It is logical to have it on a proper basis.

At present solicitors may have entered arrangements where they presume that what they are doing is not in breach of the rules.

'If the ban continues, the defini-tion would have to be drawn very widely and go against a lot of things people think are OK at present.'

On this argument, the ban would look not to be very long for this world.

That would please one specialist personal injury solicitor, who says: 'In practice paying referral fees has been going on for ages.

To have any chance of winning work against the claims merchants, the high street personal injury practice has to buy work or you don't get any.

'That is the reality.

I don't know why anyone thinks it is not happening.

The Law Society should recognise reality and be proactive in trying to help the high street practice.

There is a wide debate to be had on the future of smaller practices.'

Patrick Allen, president of the Association of Personal Injury Lawyers (APIL), says APIL has 'reluctantly' accepted the need to do away with the ban.

Modern marketing methods and the need to compete with non-lawyers in the field have rendered it unenforce-able.

'There are now widespread payments, so the ban is discredited,' he says.

'It has to be rethought.'

Mr Allen says APIL is reluctant because of the possible impression clients may have of their lawyer's objectivity, having paid for the referral.

As well as supporting transparency with the client, he says referral fees should not be related to the amount of damages or the result in any way.

He also expresses concern about the possibility of law centres, charities and so on 'selling cases to solicitors'.

Another fear is that relaxing the ban will leave solicitors to jump into bed with some less than savoury characters.

'As in all business, there are temptations and people may regret signing up with certain people,' he says.

'Solicitors are regulated and APIL also has its code of conduct.

If they get themselves into trouble, they will have to face the consequences.'

Leading claimant solicitor Kerry Underwood runs a practice in Hemel Hempstead where 80% of the work is civil litigation, split evenly between personal injury and employment cases.

He argues that rules should be observed as long as they are in force, and that the key issue is not the pay-ments but the degree of openness surrounding them.

'It is a rule and we are all bound by it,' he says.

Mr Underwood adds: 'The original justification for this rule is that people should not put all their eggs in one basket, but there are separate rules to deal with that.

'I've no fundamental objection to payment so long as it is absolutely transparent, notified to the Law Society and published to clients.

There should be complete transparency so everyone can see what is going on.'

But he thinks the Society is conducting the wrong debate, and that the question of how solicitors deal with after-the-event insurance is a far more pressing issue.

The reformers have some ammunition in the report in 1999 by the Blackwell committee to the Lord Chancellor's Department that the present rule may not be in the public interest because it means the whole system operates in the dark.

This informed work done by the Law Society's regulation review working party last year, chaired by Ed Nally, now the Society's Deputy Vice-President.

It said members considered 'that the ban on paying for referrals goes further than necessary in protecting the interests of clients.

'The client's real interest is in having a solicitor who is independent and in knowing the basis on which they have been referred to the solicitor,' the working party's report stated.

It went on to ask whether the fear of some solicitors that the end of the ban would force them to pay for work they now receive free was sufficient reason to maintain it.

'The Society can only justify restrictions on solicitors' business arrangements if they are necessary in the interests of the public,' the working party noted, admitting that the code 'has proved difficult to interpret and enforce'.

Among the key arguments it listed for change were that in the present situation solicitors are unable to compete on a level playing field with other providers of legal services.

Clients would be better off being referred to a solicitor than to someone who is not qualified or not independent, and if solicitors can pay other solicitors for referrals they should be able to pay other businesses.

The difficulties of interpreting and enforcing the code meant that it operated unfairly against those who tried to comply with it, the working party said.

It also weighed up the arguments for the status quo.

These centred round the idea that referral payments would damage the reputation of the profession, and that the prohibition demonstrated solicitors' independence and should be used as a marketing tool.

There was also concern that clients would think they were referred to a solicitor on the basis of professional quality, rather than for the introducer's financial benefit.

December will see these arguments thrashed out yet again.

Both sides are hoping that this time there will be a firm answer one way or the other.

Mark Smulian is a freelance journalist