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False promises

 Referral fees are an emotive issue for solicitors. The issue of what, exactly, constitutes a ‘referral’ and, indeed, a ‘referral fee’ has troubled regulators and the courts for more than ten years. Many attempts have been made to address the issue, including the introduction of compulsory regulation for claims management companies.

Despite the Legal Services Board having concluded that there is currently no regulatory case for banning referral fees as there is no evidence of consumer detriment, the Ministry of Justice announced in August its intention to introduce a ban on referral fees in personal injury matters. Under pressure from Jack Straw (who apparently did not feel the need to ban referral fees during his tenure at the MoJ), the government announced that their own ban would be introduced by way of amendment to the Legal Aid, Sentencing and Punishment of Offenders Bill (LASPO).

LASPO was already well on its way through parliament by the time of the announcement and had progressed yet further by the time the amendments were actually put forward on 25 October. This means that the proposed ban will not only avoid normal consultation requirements (indeed, it seems to fly in the face of the conclusions of the most recent consultation on the subject), it has also been subject to less parliamentary scrutiny than the remainder of LASPO.

Built on a myth

The position is less than satisfactory. Successive consultations and reports tell us that the ‘compensation culture’ is a myth and there is no reason to ban referral fees in order to protect consumers. Now we are faced with a ban, apparently on public interest grounds, that does not go so far as to ban referral fees in all matters, merely in personal injury matters (and any other matters that may later be added in regulations). The ban is to be enforced by regulators in circumstances where the LSB has found no regulatory case for it. In practice, this means that the regulators ought not to go further than the four corners of the ban in the statute because any extension of the ban will have to be supported by evidence.

LASPO is currently on its way through the House of Lords. There may well be changes to the precise wording of the currently proposed ban that could have far-reaching implications for the extent of the ban as finally implemented. I do not therefore intend to comment in any detail on the precise scope of the proposed ban at this stage. As matters stand, the mischief that is being addressed is the exchange of money for information that leads to a client instruction. Paying for and being paid for referrals are both forbidden.

One of the issues that is not addressed by LASPO is the definition of ‘services’. It is left to regulators to make rules providing that payments that would otherwise be caught by the strict wording of the ban will not be a breach if genuinely made for ‘services’ or for another reason, not a referral. Unfortunately, this is one of the issues that so troubled the courts in the days before the Law Society relaxed the ban on referral fees in 2004. Some businesses that would later become CMCs set up marketing schemes or claims support services in order that the payments made were not for the information/referral but for the services supplied. These arrangements have frequently been the subject of regulatory or judicial scrutiny.

It won’t work

I don’t think that the ban as proposed by LASPO will solve the problem of referral fees – if, indeed, it is a problem, which remains open to debate. While I disagree with the concept of referral fees, there is clearly a business case to be made in their favour. It cannot be denied that the growth in referral fees and the success of claims management companies would not have occurred if there was no commercial driver.

I have no faith whatsoever that insurers will immediately relent and reduce premiums for motor insurance – one of the stated drivers behind the introduction of the ban. Similarly, I am not at all sure that leaving the enforcement of the ban to regulators is the best option. Certainly I would never advocate that the payment of referral fees should be a criminal offence – there are far too many irreconcilable uncertainties for anything so draconian – but I cannot see why the payment of referral fees should not be a breach of statutory duty giving rise to a civil cause of action.

I am interested to see how LASPO finally develops and, thereafter, how the LSB and the SRA deal with their obligations to enforce the ban. In the world of OFR and evidence-based regulation, one wonders how the ban will be transposed into the regulatory framework. I suspect that the regulators will have a difficult job ahead of them. It is likely that this will be one of those areas where the SRA will have to issue guidance.

Susanna Heley

This article was first published by Solicitors Journal and is reproduced by kind permission.


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