Society moves to allow fee sharing

By Neil Rose

Moves to allow law firms to accept investment from non-solicitors either in cash or in kind gathered pace last week after the Law Society's ruling council backed a relaxation of the ban on fee sharing in principle.

The council sent out a more complicated message on the future of the ban on paying for referrals, providing no clear direction on what level of regulation should be pursued.

However, in a letter to the Law Society, the Office of Fair Trading (OFT) has warned that current prohibition probably breaches competition law and could be the subject of OFT action.

As a result of the vote in favour of fee sharing - which was not, at this stage, a formal policy decision but a strong steer to the standards board - the board will draft rules on law firms accepting external capital and also being able to share fees in exchange for services provided by a non-solicitor, such as IT products.

There will be safeguards in place to ensure solicitors' independence.

These could include disclosure requirements, a cap on how much a firm might pass to a third party, and rules on who firms could take money from.

Council members were split on whether to support two more radical models: allowing law firms to take on, in effect, franchises of non-legal brands, and allowing in-house legal departments to convert to independent law firms.

There was broad opposition to linked partnerships.

This would be a law firm practising under, for example, an accountancy firm's name and receiving financial assistance, in return for paying over some fees.

Liberalising the rules on fee sharing is not seen as being at the same level as moves to allow multi-disciplinary partnerships or employed solicitors to offer services to the public.

Fee sharing would give firms more business flexibility but they would retain control over their practices.

The five models are not exhaustive and it is too early to say exactly how far the proposed rule will go.

Standards board chairman Andrew Holroyd told the council that many firms see their future depending on fee sharing.

'If the profession is to survive, it needs flexibility, muscle and innovation,' he said.

'Without fee sharing, the hands of the profession may be unreasonably tied and allow less scrupulous competitors to move in.'

Providing a steer to the standards board on referral fees, 50% of council members accepted that a total ban was unjustifiable and/or unachievable.

Some 36% did not, while the rest abstained.

There was no majority either way on whether publicly funded work should be excluded from any relaxation of the ban or whether there should be carve-outs for areas of work, such as personal injury.

In the event of deregulation, the council appeared to favour allowing the payment of referral fees in schemes where the introducer does not have an interest in the client's matter.

Some 45% voted for this idea, while 27% were opposed.

The OFT letter said it was concerned that the referral fee ban may be hampering the development of the market and also preventing solicitors from competing effectively.

It suggested allowing what council members characterised as 'ethical referrals' by requiring any referral fee to be disclosed to the client and ensuring the referral does not breach any core professional duties.

'In order to achieve this, it may be necessary to place on the solicitor the responsibility for ensuring that both parties to the transaction comply with the appropriate ethical code,' the OFT said.

It suggested this could be achieved by requiring that solicitors only pay referral fees to a member of a body that has comparable ethical standards, or ensure that, for the purposes of the transaction, the referring party complies with such standards.

The OFT said it is 'highly unlikely' that the current ban 'could reasonably be considered necessary in order to achieve the identified objective of avoiding interference with the independence and integrity of solicitors'.

In the event that it is not changed, 'it will be for this office to consider whether such a rule infringes UK competition law'.

Mr Holroyd said the next step on referral fees was to draft rules on all the options, from a complete ban upwards, for further consideration.