Panel games

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19 December 2010

Posted by Neil Rose, Editor, Legal Futures

Price of everything: do referral fees devalue clients?

We all know where the Bar stands on referral fees – both the Bar Council and Bar Standards Board (BSB) strongly oppose their existence and have not been slow to express their views publicly. At last week’s meeting of the BSB’s full board, there seemed amazement that anyone could support them.

Certainly the BSB’s response to the Legal Services Board’s consultation on referral fees has moved the rhetoric up a notch. Perhaps most interesting is the criticism over an undeclared potential conflict of interest on the part of the Labour-supporting members of the Legal Services Consumer Panel, which recommended to the board the policy of improved transparency but no ban.

The Labour Party offers members discounted legal services through Derby law firm Flint Bishop, and receives referral fees for doing so. Legal Futures was the first to note that half of the panel’s eight members were declared Labour supporters (which happened by chance as the recruitment panel did not know about such interests), but to me it seems something of a stretch to connect the two. It is an affinity deal like several others the party has and I suspect most Labour members are unaware of it if they haven’t had reason to make use of Flint Bishop. And even if they did, would it really be much of an influence?

And how far should this go? Should panel members also declare an interest if they have an insurance policy with a company that charges referral fees which thereby (in theory at least) reduce their premiums?

The wider point raised by the BSB is the risks posed by lawyer-to-lawyer referrals. They are currently exempt from the regulation in rule 9 of the Solicitors Code of Conduct, and the LSB consultation paper only mentions them twice – it is, in fact, not clear whether the recommendations for greater transparency actually apply to them. The wording rather indicates not.

The consultation records the BSB’s concerns about the risks of lawyers putting their financial interests ahead of their clients’ interests when referring work to other lawyers. But the LSB says that even if it was to accept those risks in theory, “we would expect to be able to see evidence of consumer detriment in practice”.

Clearly the BSB doesn’t have any, because it argues that the lack of “quantifiable evidence” does not prove there is no detriment, and suggests that the Solicitors Regulation Authority’s monitoring capability is limited to identifying flagrant detriment. It adds: “Experience of financial services regulation demonstrates that regulators rarely if ever find their constituents in breach of their duty to act in customers’ best interests through the quality of advice they give, save where that advice is blatantly bad.”

In the absence of evidence, the BSB relies instead on more general assumptions, boiling down to this: “We think it implausible to say the least that a lawyer who selects from among only those lawyers prepared to pay him has reached a well-reasoned conclusion that no lawyer who does not pay for a referral is ever better placed to meet the needs of his customers, and that the lawyers prepared to pay for referrals, and compete in the auction for them, happen to be the cream of the competition. In all other markets, the converse can be expected to be the case – you pay for what you cannot attract on merit.”

It is a reasonable argument but one the LSB must have considered in coming to its preliminary conclusions. The BSB is right to say that referrals from non-lawyers have totally overshadowed those from other lawyers, but that has not stopped various businesses targeting the latter market, most notably Manchester firm Pannone’s Connect2Law network. That the referral fee rules do not apply undoubtedly makes it easier to operate in the field.

The BSB is exceptionally sensitive to issues of undue influence – a policy on barristers providing solicitors with gifts and hospitality was one of its first acts back in 2007 – but ultimately the Bar is a minor player when it comes to referral fees. It is stirring, rather than leading, the debate.

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