The decision to lift the ban on referral fees has been welcomed by some in the profession, especially in the field of personal injury.

Yet conveyancing specialists are concerned that the rule may be contrary to clients' and solicitors' interests, reports Mark Smulian

Like all the best coups, the vote by the Law Society Council to allow payments of referral fees took opponents of the measure by surprise (see [2004] Gazette, 8 January, 1).

The council had rejected the idea only last October.

Few expected it back on the agenda as quickly as December, or saw any reason why the council would change its mind so soon.

Change it did though, and by 43 votes to 34 solicitors are now free to enter agreements for the introduction of clients with, for example, estate agents, banks and marketing companies.

However, the change still needs formal approval from the Master of the Rolls - a hurdle that gives opponents some hope of reversing the vote.

But that aside, referral fees will become a fact of legal life, except in legal aid and criminal work.

The new rule will require that clients must be told that the fee has been paid, and that they are free to go elsewhere if they find this objectionable.

Its supporters hope that this transparency will make enforcement easier for the Office for the Supervision of Solicitors than the old rule, which was widely believed to be evaded.

In his rulings concerning The Accident Group last year, Senior Costs Judge Peter Hurst decided that so-called investigation payments made by law firms under the scheme were actually referral fees and so not recoverable under a conditional fee agreement.

However, there has been no action taken against panel firms, in part because of the lack of clarity in the rule.

There is a range of other safeguards attached to the new rule, such as a prohibition on those who introduce clients to solicitors from cold calling; nor may they try to influence the advice the solicitor gives.

Council backbencher Philip Hamer, who represents Yorkshire, masterminded the initiative to bring the subject back to the agenda and canvassed support in the background.

He argues that it was 'pretty plain' that removal of the old rule was firmly in the sights of the Office of Fair Trading (OFT), which argued that the ban prevented solicitors from getting business.

In a letter to the Law Society last year, the OFT said that the ban on referral fees probably breached competition law.

It had also received complaints about it from a major estate agency chain and a law firm facing the Solicitors Disciplinary Tribunal over claims that it paid referral fees to a claims management company.

Mr Hamer said the previous attempt in October had been lost when a clause was dropped which required ethical conduct from the professions with which solicitors would deal.

'As a solicitor, you can charge very keen prices, advertise heavily, or pay someone else to send you business,' says Mr Hamer.

'In October, we voted on this, but without the clause on ethical conduct by other professions.

I thought from the course of that debate that it would probably be accepted if that clause went back in.'

Mr Hamer, senior partner of Hull-based Hamers, maintains that the old rule was ignored by many firms, which put those who did observe it at a commercial disadvantage.

'There is a better chance now of enforcing it, but I think the big chains of estate agents will comply anyway because our rules have legal force once approved by the Master of the Rolls and they will not want to go against that,' he says.

He also contends that the change regularises a largely forgotten reform by the Law Society in 1992, when it permitted the use of referral fees for conveyancing involving banks and building societies.

Since most large estate agency chains are now owned by such financial institutions, the opportunity was there anyway to work around the previous rule by using this exemption, he points out.

One prominent supporter of changing the rule was Kevin Martin, the Society's Deputy Vice-President, and a consultant to Stratford-upon-Avon firm Lodders.

He identifies three key issues: 'It was difficult to police the rule and it was widely flouted, especially in personal injury work.

Secondly, there was no level playing field because other providers of legal services could pay referral fees when we could not.

And we were under pressure from the OFT that if we did not introduce this, they might do it for us.'

Opportunities to make use of this new right in personal injury and conveyancing are obvious, Mr Martin says, but 'it will be interesting to see what will be the opportunities in other fields, as they have been less widely talked about'.

He speculates that accountants could be persuaded to work with law firms with strong tax departments and that financial services work might develop - a field 'which has not been taken up by the profession with huge enthusiasm'.

Even though he supports the change, Mr Martin says firms should not feel obliged to start paying these fees, and he was concerned to discover that one medium-sized firm has already allocated 40,000 in its budget to pay them.

'I do hope that firms will not feel this is something they have to do.

I have spoken to some who are making large allocations in their budgets for referral fees to keep personal injury going.

I find that quite worrying.

'The old rule was flouted, but I hope it will not open the floodgates.

Clients can choose not to use the solicitor they are referred to for a fee.'

There has also been support from specialist groups.

David Marshall, president of the Association of Personal Injury Lawyers, says: 'It has been going on in the real world anyway.

'We had a rule that was in effect unenforceable and the only solution was to have a structure for setting referral fees.

Some took the view that they could make no payments while others found ways they believed got round it.

People were upset there was no level playing field and it is important everyone knows where they stand.'

Mr Marshall, managing partner of south London firm Anthony Gold, says that because the new rule will prohibit payments that are against the client's interests, the Law Society will be free to concentrate only on cases that do give cause for concern.

He says: 'Those who have kept away from any referral scheme can now look at them without being in breach of the rules and decide how to market themselves.'

Ian Shovlin, chairman of the 168 firm-strong Motor Accident Solicitors Society, says: 'We said the code should be replaced and fees should be transparent.

It is a competition issue, as solicitors cannot compete unless they can make these payments.'

Mr Shovlin, who is senior partner of Black Country firm Higgs & Sons, agrees with others who say that anecdotal evidence suggests that some firms pay fees anyway.

'We could not compete with unqualified providers otherwise.

It is a question of commercial reality,' he says.

The Law Society accepts that some solicitors find the idea of paying the fees distasteful, but argues that it could be viewed as part of a marketing budget, since only the largest firms have the resources to promote themselves effectively through press or broadcasting advertisements.

But the losing side has not given up.

Denis Cameron, who represents Lancashire and northern Greater Manchester on the Law Society's Council, is angry both about the substance of the decision and the way it was reached.

Mr Cameron, who is also chairman of the Society's land law and conveyancing committee, argues that whatever the merits of referral fees in personal injury cases, they are contrary to both solicitors' and clients' interests in conveyancing.

He maintains that if the referrers are estate agents, they will have a direct interest in the outcome, as only a successful sale will secure their commission.

A solicitor could be constrained from giving fair and independent advice on the price, on whether the buyer should proceed at all, and on, for example, ancillary financial products that may have been sold by the referrer.

He fears that the fees will not in fact be transparent, with estate agents presenting a complete marketing package to clients in which it would be hard to tell that, perhaps, the solicitor's fee is low and the agent's fee high.

Referral fees will also have to be paid out of the already tight margins that conveyancers work to, he says.

Mr Cameron also contends that there are important differences in the ways in which solicitors engaged in the personal injury and conveyancing markets.

Conveyancing is a finite market, he argues, in which the use of referral fees can only mean that work is done by solicitor A and not solicitor B, yielding no benefit to the profession.

Studies have shown, by contrast, that there is a vast untapped personal injury market.

He is also concerned that there has been no reported estimate of how much it would cost the Law Society to regulate the new system.

His disquiet about the vote is such that he may ask his committee, which meets this month, to make representations against the change to the Master of the Rolls, or even to call a special general meeting of the Society to debate the issue.

Mr Cameron also expresses concern with the way the council dealt with the debate in December, with amendments being considered throughout the course of the meeting right up to when the motion was tabled.

He adds: 'There were eight speakers in favour and only five against.

It was then proposed that the question should be put, and the debate was closed down early.'

Mr Martin says he thought the motion would be defeated until a few days beforehand, when he sensed that 'opinion had polarised'.

Mr Hamer says that it is normal for amendments to be accepted during the meeting, and that it would be pointless to hold a debate unless the proposition could be altered.

'I regretted that the debate closed after an hour and 20 minutes, but it was within the rules,' he says, adding that he felt some opponents of the change left it late in the proceedings to signal their wish to speak, in the hope of making a contribution that would be fresh in members' minds just before they voted.

'I know there is some ill-feeling but there was a majority of nine.

I would have liked that to be bigger, but it's a majority.'

Mark Smulian is a freelance journalist