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Referral Fees The big debate
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To whom do you refer?
Ineffective regulation discourages solicitors from entering into legitimate referral agreements while largely ignoring consumers’ interests, says Craig Jones. (Take part in our Referral Fees survey and let us know what you think.)
It’s almost 5 years since the relaxation of rules on referral fees for solicitors. Some are vehemently opposed to them. Others are supporters. John Heller of Hammonds Direct felt they were perfectly legitimate. With the introducer paying a huge amount of money for the marketing and the branding he was quite happy to pay a referral fee. He felt that banning referral fees would be grossly unfair. Of course, that’s the same Hammonds Direct that went into administration recently.
I’m not against referral fees. It is legitimate for a solicitor to pay a third party to deal with marketing and to generate their work on a referral fee basis, but controls are needed to stop the “financial traffic in personal injury claims”, as Lord Falconer put it. The problem with referral fees is four-fold:
- Greed
- ineffective enforcement
- lack of reality, and
- different rules for different professionals in the same market
The greed is demonstrated across the board: straightforward road traffic accident claims, with fixed costs averaging around £1,100 where referral fees of £800 plus are not unheard of; serious personal injury claims where there are reports of ‘bidding wars’. Little wonder, then, that many of today’s personal injury solicitors whose predecessors were championing safety of the working classes are now consigned to work in an industry considered by many to be ‘grubby’.
In conveyancing, we are also seeing obscene referral fees. £350 conveyancing fees decimated by a referral fee of £200? Surely the better position for the client is that they pay the £150 that the conveyancer is able to do the work for?
The burden of enforcement
On enforcement, the solution should have arrived with the Claims Management Regulations. However, the approach seems to have been to shift the burden of enforcement to solicitors. The practice of ‘clipboarding’ (eg approaching a person in the street to ask them to participate in the now ubiquitous ‘lifestyle questionnaire’) is not permitted as a way of generating referrals. But did it not strike anyone else as strange that it was a change to the solicitors regulations rather than a change to the Claims Management Regulations that effectively brings this home? Surely the right place to enforce this ban is in the latter? Of course, it’s easier to enforce with solicitors. Most of us spent 6 years of hard work to get our practising certificate, so disciplinary action is a real and personal threat.
Our core duties are surely offended when the referrer presents the offer of cases coupled with a compulsion to use a particular ATE policy (which of course they get a com-mission on) and a particular medical agency(which they either get a commission on or perhaps even own).
The unpalatable practice that seems to be arising more recently is in relation to financial mis-selling claims – particularly payment protection insurance. Certainly the solicitor will only take them on if they have reasonable prospects of success. But many of the referral companies then want to take not only a referral fee but also a slice of the client’s damages. Surely the duty to give best advice demands that the first piece of advice the solicitor must give to the client is to instruct another solicitor. If the client brings such a claim to Simpson Millar LLP, we, like many other firms across the country, will do the case on the basis of “no win, no fee, no kidding”. This is a practice which seems to be ignored by regulators.
Pumping out the statistics
Then there’s the lack of reality. The ABI press machine regularly pumps out the statistic about how 40 pence in the pound is being paid out in legal costs. There is never any mention of how a significant amount of that 40 pence is effectively ‘repaid’ back to the insurance companies or, more accurately, subsidiaries owned by them, in referral fees. Is the jump in this 40 pence figure, sometime after the March 2004 legitimisation of referral fees, just a coincidence?
The purpose of our referral fee code is apparently to inform the consumer about the referral fee prior to their choosing a solicitor to enable them to make an informed choice. But if that is the case, why are details of the referral fee buried deep in the tiny and almost unreadable terms and conditions? Surely this approach is contrary to the spirit of the rule requiring disclosure of referral fees.
Of course, it’s incumbent on us to make sure the client has read it. The authorised business, sadly, has no such requirement but nonetheless we are expected to effectively enforce a rule by refusing to do business with the referrer. This is where the fourth and final problem arises – different rules for different professionals performing the same service. A referrer reluctant to disclose referral fees is better served by a licensed conveyancer or will writer than a solicitor because they do not have the same requirements relating to referral fees. This creates an uneven and difficult playing field for solicitors looking to compete with other professionals in the same market space.
Make Referral fees Work:
Simple measures would ensure referral fees work properly:
- capped referral fees (to reasonable levels)
- proper enforcement by the Claims Management Regulator
- joined-up and informed thinking between the regulatory bodies involved
- template referral agreements, issued to claims management companies by their regulator
- a central and public register of referral fee arrangements – it is not commercially sensitive – it’s public knowledge – that’s the objective behind the referral fee code
- Someone, somewhere, ask the consumer what they think
Take part in our Referral Fees survey and let us know what you think
This article was published in Solicitors Journal on 17 February 2009 and is reproduced by kind permission.
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Craig Jones
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23/03/2009
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