29 September 2010Print This Post

LSB: no ban on referral fees but publish all agreements with introducers

Kenny: ban would be wholly disproportionate

The Legal Services Board (LSB) has confirmed that it does not back reinstating the ban on referral fees but suggested that instead all agreements between lawyers and their introducers should be made public.

As first reported on Legal Futures last month (see story), the LSB said today that there is insufficient evidence to make the case for a ban, but that transparency and disclosure need to be improved. It also said there should be the same rules for the different parts of the regulated legal market so far as possible.

A consultation paper issued today reflects the LSB’s first thoughts and says they are not definitive. The recommendation that all agreements should be published by the regulators is bound to be highly controversial, and the consultation said it wanted views on whether it would raise issues in relation to commercial confidentiality.

The LSB said: “Publishing this information for scrutiny by the market, consumer organisations, and consumers themselves should help to ensure that agreements are structured with consumer interests at their heart. We believe that this level of transparency will aid general economic efficiency, allow for the accurate tracking of trends by regulators and give firms every incentive to consider actively where and how to invest to acquire work in a way which minimises their own costs and so contributes to lower charges for consumers.”

Another safeguard will be to require lawyers to tell their clients to whom the referral fee is paid to and for what services, the value of the referral fee in pounds, and the consumer’s right to shop around for an alternative legal services provider.

The LSB said the objective must be “to preserve the beneficial impacts of referral fees in the legal services market [such as promoting access to justice in personal injury], while addressing the important concerns and confidence issues that have been highlighted”.

The consultation, which is open for 12 weeks, has been informed by a report from the Legal Services Consumer Panel (see story) and an economic analysis commissioned by the LSB (see story).

In his introduction to the consultation, LSB chief executive Chris Kenny said: “Our scrutiny has been focused on the regulatory treatment of referral fees, assessed against the regulatory objectives set out in section 1 of the Legal Services Act 2007. We do not offer a view on any wider public policy arguments for their retention or abolition. The view of our consumer panel, can be summarised in their conclusion of ‘reveal, regulate, so retain’. The panel argue that the last element depends on the delivery of the first two, which are of equal importance. The board broadly believes that this provides a clear basis for further discussion. Our preliminary hypothesis is that the simple solutions of an outright ban or a laissez faire free for all are both unacceptable”.

He said a ban would be “a wholly disproportionate action when the economic evidence is that consumers do not suffer detriment from the existence of referral fees and, indeed, that there may even be access to justice benefits from their retention”.

He continued: “Lawyers are under no obligation to pay such fees: independent marketing is a viable alternative. To outlaw such practices when viable alternatives exist therefore could fail a test of regulatory proportionality. But it would be wrong to ignore the public, professional and judicial concern about referral fees. As marketing in this area is not wholly effective, the level of costs for customer acquisition is almost certainly higher than it would be in a better functioning market.

“Customer acquisition costs should fall over coming years, partly because of better technology, greater managerial sophistication in law firms generally and because of increased competition with the advent of alternative business structures (ABS). New ABS firms may emerge that capture the entire value chain of both customer acquisition and legal advice, so reducing excess profits. The question for regulation now, is how best to put incentives in place to reinforce ethical behaviour that maintains public confidence, whilst making the market work more effectively. We believe that the consumer panel’s recommendation about transparency is crucial.”

By Legal Futures

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