The review of how well the referral fee rule is working did not find overwhelming evidence one way or the other, Neil Rose and Philip Hoult reports

If any issue highlights the tensions within the Law Society Council over its dual role of regulator and representative of the solicitors' profession, it is the debate over referral fees.


There is little doubt that many in the profession are against referral fees - the 20,000 solicitors who voted in last autumn's postal ballot came out 3:1 against them, while responses from local law societies, firms and individuals to the recently completed review of the referral fee rule also highlighted strong opposition.


In acting as the representative of the profession, it seems unlikely the council would accept referral fees. But acting as the regulator, the primary concern is the public interest - and it is this kind of friction that is leading to separation of the two functions from next year.


Professional rules should inhibit solicitors from competing in the market-place only if there is a demonstrable public interest in imposing a restriction; even then, it has to be the least restrictive rule necessary to achieve a legitimate public policy objective. There are also legal issues - the Office of Fair Trading wrote to the Law Society in 2003 to say that the old ban on referral fees probably breached competition law.


But what does the public think? As part of the 12-month review of the rule requested by the Master of the Rolls when he approved the lifting of the ban in March 2004, the Law Society commissioned ICM Research to poll 1,023 adults. Three-quarters of respondents did not even know that solicitors were allowed to pay referral fees, while 58% thought it was wrong to do so. However, when asked why, 38% of them could not identify a particular reason. At the same time, there are only two files open at the Consumer Complaints Service concerning possible breaches of the referral fee rule.


Alongside this work, has been an effort to understand how referral arrangements operate; there is an argument that it is better if a fee is involved in such deals because they are more transparent as a result of the disclosure requirements.


A section of this year's Law Society omnibus survey of solicitors on topical issues was devoted to referral fees. Some 312 of the 1,100 solicitors polled said they had, in total, 379 referral arrangements in place - 52% of them worked in conveyancing and/or personal injury. Accountants/business advisers, other law firms, estate agents and claims management companies were the main introducers firms had deals with.


Fees were mainly paid per referral (at an average of £126), while around 30% were lump sums, averaging £3,024. Most firms said they did not charge referred clients a higher fee than those who came direct, although 14% of conveyancing practices did. A separate survey of conveyancing firms by Hampshire Law Society found that those that paid referral fees generally charged more than firms that did not.


Nearly half of respondents to the Law Society survey (44%) said the referral fee rule had led to an increase in their gross fee income, even though more than one-third of firms said that such work accounted for no more than 5% of their business.


But the main cause for concern revealed by the survey came in the finding that 45% of respondents did not check that introducers had explained the details of the referral arrangements to clients. A lot of firms also did nothing else to monitor referral arrangements.


This was backed up by feedback from the Law Society's practice standards unit, which visits firms to check compliance with the practice and accounts rules. Of 190 visited in the first quarter of 2005, 37 paid referral fees; of them, 11 had systematically failed to disclose details to the client (four had done so occasionally), while 11 did not check disclosure by the introducer. Seven firms breached both requirements.


The breaches discovered by the review - and the issue of enforcement - prompted an angry response from council members at last week's meeting. 'Where we have looked for bodies we have found them, and where we have found them they were massacred,' was the reaction of Michael Garson, member for residential conveyancing.


There are always going to be problems in the early days of a new rule - Chancery Lane's professional ethics team received almost 1,000 queries about it during the first year - and the question of compliance was equally fraught when referral fees were banned. But, while there were concerns, the review did not throw up compelling evidence of problems with solicitors' independence or clients' choice of adviser.


Patrick Allen, a member for the Association of Personal Injury Lawyers, said he saw 'no adverse impact on clients' in his sector. 'If firms are getting more business, they are getting more clients,' he added. 'More people are getting compensation and they do not pay for the referral fees themselves. We must make the rule work properly and it is far too early to scrap it.'


Former Law Society President Michael Napier, senior partner of Irwin Mitchell and no fan of referral fees, also warned that if a ban were reimposed, law firms would lose out to claims management companies, which would 'Hoover up' cases. 'The horse, regrettably, has bolted,' he said.


In presenting the review last week, the standards board said there is a clear need for further research into the operation of the rule and also for more guidance to the profession.


However, the council was not prepared to allow that much time. Successfully calling for a regulatory impact assessment on reintroducing the ban to be carried out in time for its July meeting, former President Carolyn Kirby said: 'I ask myself who wants referral fees and who benefits from them. The answer, in my mind, is no one to whom we [the council] owe a duty.'


Of course, it is now only a few months before the council hands over such decisions to the new regulatory board, so any vote this summer could be revisited shortly afterwards.


Only one thing is clear from all this: referral fees remain in the melting pot, and will be there for some time to come.