The Solicitors Regulation Authority (SRA) has issued its first warning notice to the profession over the way personal injury firms are dealing with the referral fee ban.
The notice highlights concerns that some solicitors are so busy ensuring they do not breach the statutory ban that they are failing to consider their wider duties under the SRA Code of Conduct.
The regulator said that some claims management companies (CMCs) are seeking to charge clients a proportion of their damages in return for being referred to a suitable law firm and/or for other services. In some cases firms are being asked, as part of their agreement with the CMC, to deduct these payments from the client’s damages or even to forward the client’s damages to the CMC.
The SRA said firms need to consider whether their ability to advise the client about the agreement they have entered into is impaired by their relationship with the introducer.
“The Solicitors Disciplinary Tribunal has on a number of occasions criticised solicitors for failing to give such advice to their clients and for acting where their own commercial interests in a referral arrangement conflict with the interests of the client,” it pointed out.
“Money can only be deducted from a client’s damages with the client’s informed consent. Sending a client’s damages to a third-party introducer would also require the client’s consent, but is unlikely ever to be in the client’s interests.”
Arrangements that involve the introducer carrying out and being paid for work on a matter may not breach the ban provided that it is a genuine service and is reasonable in all the circumstances, the SRA said.
But it questioned whether advising a client on funding their matter – including explaining and signing them up to a conditional fee agreement or damages-based agreement – would fit this.
“You have a duty to ensure that your clients receive sufficient information to make informed decisions about their matter and the way it will be handled. In our view, outsourcing this work, or relying on a third party to provide the necessary information to the client, represents a significant risk to your ability to achieve the relevant outcomes.”
The SRA said there have also been “suggestions” that some solicitors are not exploring whether the client has legal expenses insurance so that the firm can charge success fees.
Other concerns include clients purchasing insurance, medical reports or other products or services at inflated prices so that the firm or introducer receives a higher commission.
As well as the commissions potentially being caught by the referral fee prohibition, the warning notice said that “even if the client has been sold these products or service before instructing your firm, you should be careful to ensure that you are not facilitating arrangements that are detrimental to clients’ interests”.
It also highlighted transparency issues around arrangements that ensure it is the client, rather than the third party introducer, who provides information to the firm about a potential claim.
“You need to be careful to ensure that the client is not misled about who they are dealing with and who is providing particular services,” the SRA said. “You will also need to… tell the client about any financial arrangement you have with the introducer.”
SRA executive director Richard Collins said: “We decided that a measured approach as firms got to grips with the ban was the best way forward. We are taking a more proportionate and constructive approach to enforcing the ban wherever possible.
“Of course we will take formal enforcement action against any firm flagrantly breaching the rules. Those unwilling to change their practices and who fail to co-operate will face action.”
See the full warning notice here.