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Onus on firms to show no referral fee being paid

Referrals between companies in same group will be caught

27 March 2013

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The SRA has made it clear that where it suspects there may be a breach of the ban on referral fees, coming in force on April 1, the onus is on firms to show that the payment was not for the referral.

The regulator has also warned that referrals to or by an ABS which operates within a group of companies will be caught by the ban.

In the latest guidance on the referral fees, published on its website, the SRA said: "If it appears to us that a payment may have been made for a referral or for making an arrangement, we will treat that as a prohibited referral fee for the purposes of LASPO, unless the regulated person can show that the payment was made for services or for another reason and not as a referral fee.

"Where you advertise jointly and pay only for that service, you are unlikely to breach the provisions of LASPO - however, you will need to be satisfied that the arrangement does not contain a referral fee element."

The regulator gave the example of a claims management company advertising in its own name, running a call centre and referring clients to a panel of solicitors in a return for a fee.

The CMC claims the fee is for advertising, but it is charged on a per client basis.

"A firm in this situation would need to show that the payments were genuinely for the services described," the SRA said.

"In this case the vetting would appear to be minimal and it is difficult to see how the payment for advertising could be genuine as it is being paid 'per client' rather than reflecting the actual cost of advertising. It is therefore likely that the payment would include a referral fee element."

The regulator said it would take into account in particular whether the fee charged was excessive, whether payments were made per referral and whether a genuine service was being provided.

"Where it appears to us that a referral fee may have been paid, the onus will be on the regulated person to demonstrate that the payment was not for the referral."

The regulator added, in an FAQ section, that referrals within a group of companies, which includes an ABS, would be caught by the ban.

"If you merge your firm with another business to become an ABS, any referrals within the new business will not be caught. However, if the ABS is part of a group of companies, referrals within the group will be caught."

Agnieszka Scott, SRA director of policy, said: "Responses to our consultation included requests for us to pre-approve arrangements before the ban came into force. It is not for the SRA to provide safe-harbour advice or approve business models.

"Those with concerns about their firm's ability to comply with the ban or the impact the ban will have on them should contact us through our supervision function so risks can be identified and managed at an early stage.

"Firms need to remember that the ban comes into immediate effect on 1 April. There is no transitional period."

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