Paying the piper for a bit longer yet

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1 June 2011


Posted by Neil Rose, Editor, Legal Futures

Solicitors having a rational argument about referral fees

Put six lawyers in a room and you may well get nine different points of view on referral fees. But could the end be nigh for this fierce debate, which has split the profession asunder for many years? As the Legal Services Board (LSB) recognised in its decision last week – and secretly probably hopes – the advent of alternative business structures could render the issue irrelevant.

I have written before about how for some of the bigger claims management companies, doing the whole case, from capture to completion, makes a lot of sense, particularly with the Jackson reforms putting pressure on fees in personal injury.

It might also be that big brands with big marketing budgets roll into town and blow away most claims companies – no more middle man.

But it is a stretch to predict at this stage that referral fees will be entirely eliminated – the brands will take time to establish themselves, not all claims companies will buy in a legal function, while referral fees have sprouted in other areas of practice, most notably conveyancing and financial mis-selling.

This is what makes the approach of online conveyancing service In-deed, launched last week, so appealing – what would have been the referral fee is called a “service management” fee and is payable up front, by the client. The panel firms do not have to dirty their hands with it at all.

It may take quite a long time for this to catch on, however, so is the LSB’s plan going to work?

Firstly it is worth noting that, not for the first time, the LSB has pulled back from an initial intention to take a more active and prescriptive role in regulating. It is only right that it take an outcomes-focused approach instead (given how it is preaching that style to those it oversees), leaving the decisions to the frontline regulators.

It will disappoint some, however, that this also means there will not be the mythical level playing field as each part of the legal profession may take a different approach to the issue – expect the Bar Standards Board to look very hard at whether it can justify a ban, for example, while the Solicitors Regulation Authority is likely to focus on improving transparency.

Though it leaves open the possibility of limited bans, the LSB’s emphasis is on better disclosure and compliance. It was clearly hurt by the way its idea of publishing all referral contracts was construed and then dismissed (at the time LSB chairman David Edmonds was even moved to leave a comment on my blog on the issue).

There was “significant misunderstanding” of this suggestion, last week’s decision document complained. “The publication of referral contracts was designed to give confidence to the market about the way in which referral fees and referral arrangements work. It would be inappropriate to view them as a form of disclosure targeted at individual clients… The board expects that consumer bodies and others may want to use the information… in order to better help consumers choose their lawyer.”

So the idea has not been entirely ditched. Publication “could aid competition” and it remains an option that regulators should usually consider, according to the new guidance.

Ultimately the most frustrating thing about the LSB’s decision is that it does not bring the debate to a close. Now, new guidance in hand, all the regulators will have to review their policies on referral fees, with the LSB breathing down their necks.

So, unless ministers swoop in and decide to ban referral fees anyway on public policy grounds (which is not impossible, even though most people think enforcing a ban is), the debate rumbles on.

Perhaps, in the new, more commercialised world of ABSs paying for referrals will become less contentious. Perhaps more law firms will seek to distinguish themselves by marketing the fact that they do not pay referral fees (some already do, such as Lampkin & Co’s RTA110 in personal injury and Hal Emmett Solicitors in conveyancing to name but two).

Referral fees will not go away any time soon. At the moment, in personal injury at least, it is the main way to bring in clients. But I suspect that the new variegated world of ABSs will bring with it many other ways to acquire clients and so at last take much of the heat out of the debate.

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