Consumer panel gives green light to referral fees if there is greater transparency

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By Legal Futures

26 May 2010

Hayter: consumers will tolerate referral fees if they are in the open

Referral fees should not be banned, but require greater disclosure and more stringent regulation, the Legal Services Consumer Panel has concluded.

This could include conveyancing clients providing written consent to be referred and a ban on auctions for work.

Some of the panel’s findings, published today, will please solicitors by calling for referral fees to be openly factored into the calculation of fixed-fee regimes and the guideline hourly rates as “business acquisition costs”.

Following the Legal Services Board’s economic impact analysis published last week, which showed referral fees do not harm consumers (see story), the result of the panel’s review of referral fees is likely to put paid to any prospect of a ban being reintroduced, although it does recommend that the Legal Services Board should review the market again in three years’ time.

The panel has no authority, but its report will be fed into the Legal Services Board’s ongoing process of deciding whether it should take any action on referral fees. Panel chairwoman Dr Dianne Hayter told Legal Futures that she would expect the board to heed the report’s findings.

The panel did identify several areas of concern and said it “has its reservations about referral arrangements”. But it also found no evidence that referral fees increase legal costs or reduce the quality of work, or that lawyers provide biased advice in order not to lose work from introducers.

In personal injury, the panel said claims management companies and not-for-profit bodies have helped more people to achieve redress and increased access to justice without fuelling a “compensation culture”. It explained: “Insurers settle over 90% of road traffic accident claims, suggesting that excessive or fraudulent claims are rare.” The Advisory Committee on Civil Costs told the panel that its own investigation into the impact of referral fees on the guideline hourly rates concluded that claims management companies are not making excessive profits.

Focus groups commissioned by the panel uncovered widespread ignorance of and discomfort with the existence of referral fees. However, the researchers, Vanilla Research, described the “promise of transparency” over arrangements as a “game-changer” by addressing consumers’ concerns around charges, suitability of lawyer and freedom of choice.

The panel highlighted four particular problems:

  • Closed bids and auctions mean that work is referred to lawyers paying the highest referral fees, not the best quality lawyers;
  • Pressure-selling tactics by estate agents and insurers to accept recommended lawyers;
  • High levels of non-compliance by conveyancers and estate agents with transparency rules; and
  • Competition concerns raised by the trend for introducers to refer work to a small number of large law firms.

Deciding that referral fees nonetheless have a place in the market, the panel made 12 recommendations, including action to “replace the current hotchpotch of rules with a consistent set of regulatory arrangements for lawyers and introducers”; improved transparency requirements, including consideration of conveyancing clients having to give their written consent to being referred for a fee; and mystery shopping and enforcement action to tackle breaches of transparency rules.

It also said regulators should issue guidance on the circumstances under which a dependency on referral arrangements creates a risk of conflict, and that the Office of Fair Trading should consider investigating whether competition in relation to introducer panels is working effectively.

Dr Hayter explained that written consent to the referral would not be practical in personal injury cases because so much of the upfront work takes place over the telephone.

She added: “Consumers are surprised, even shocked, that lawyers pay referral fees, but they are willing to tolerate this so long as such transactions are conducted in the open. Greater transparency, combined with tough action against rule-breakers, is needed to ensure that referral fees work in the interests of consumers.”

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