27 May 2011Print This Post

LSB: no blanket ban on referral fees, but individual regulators can still introduce one

Edmonds: interests of consumers best served by retaining referral fees

There should be no general ban on referral fees, but individual frontline regulators are free to impose one for their part of the legal market if they can justify it, the Legal Services Board (LSB) has concluded. 

Issuing its decision on the way forward on referral fees, the LSB said that while there is “clear evidence that current disclosure and compliance arrangements do not do enough to ensure consumer and public confidence”, there is little evidence of “actual or potential harm” to consumers or the public interest. 

The board also recognised that the introduction of alternative business structures (ABSs) could change the market dynamic. 

However, the board was careful to say that there is insufficient evidence to introduce a blanket ban “for purely regulatory reasons”, which leaves it open to the government to make a policy decision. 

As Legal Futures recently revealed, ministers are considering whether it is time to reintroduce the ban. 

The LSB’s decision has pulled back from the prescriptive approach outlined in its discussion document last September and instead issued guidance setting outcomes that it expects the regulators to achieve. 

These require the regulators to review fully their current approaches and have in place arrangements that “reduce the likelihood of detriment to consumers” from referrals. 

They will have to be able to justify any restrictions – and the guidance is clear that this could mean a ban if the regulator can make the case for one across the whole or part of their regulated community. LSB chief executive Chris Kenny told Legal Futures that it would be easier for a regulator to convince the board of a ban in a specific practice area rather than a blanket ban. 

Regulators who allow referral fees will need to make sure consumers know when they are in operation and to whom they are being paid. They will also have to improve their policing of lawyers’ obligations. 

The controversial idea in the discussion document of regulators having to collate and publish all referral arrangements has not been entirely ditched, with the guidance saying it would expect regulators to consider whether this step “might aid competition” – rather than transparency, as the LSB said in September. 

The board said it was also mindful that the market is on the threshold of substantial structural change: “One possible effect is that firms’ dependence on referral fees may lessen and the importance of claims management companies in the market decrease as firms become more effective at ‘client acquisition’ as a result of more professional management. 

“Law firms may move more deeply into claims management and claims management companies may seek to gain a licence to become an ABS. Moreover, larger brands with better connection to clients may simply have greater marketing capability, so removing the need for claims management activity at all.” 

The board has pledged to undertake a thematic review in 2013-14 of the approach to the regulation of referral fees. 

LSB chairman David Edmonds said: “Before this exercise, the debate on referral fees was characterised by high passions but a lack of hard evidence. Following this detailed investigation, we are persuaded that the interests of consumers are best served by continuing to permit referral fees, but managing their impact through shining the light of transparency on them. 

“We have set out a range of measures that can help achieve this – with the approved regulators free to choose what is best suited to their part of the market. Whilst they will have the flexibility to tailor action, securing these outcomes is essential and we will track progress carefully over the coming months.”

  • The LSB’s full decision document can be found here.

By Legal Futures

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