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LSB rules out blanket ban on referral fees

31 May 2011

Frontline regulators will be allowed to ban referral fees if they can provide evidence of the reasons for doing so, the Legal Services Board has said in a report that has otherwise found there was no “purely regulatory case” for an outright ban.

Explaining the LSB’s conclusions, chief executive Chris Kenny said while it had not been possible to prove that referral fees caused harm to consumers there was also evidence that the current rules on transparency were not always complied with.

“This is a positive decision about what we expect approved regulators to do,” Kenny told Solicitors Journal. “The more we looked at the issue, the less we thought there could be a blanket solution, so it will be up to the regulators to think about their particular sectors and about how the rules would work.”

A particularly relevant factor, Kenny said, would be how the regulators ensured compliance with the rules in practice. Using advocacy as an example, he said the forthcoming Quality Advocacy Assurance scheme was likely to provide the kind of assurances the super-regulator would regard as suitable. Similarly, he accepted that the Law Society’s Conveyancing Quality Scheme could possibly be regarded as providing similar guarantees in respect of conveyancing.

According to the LSB’s report, Referral fees, referral arrangements and fee sharing, the impending regulatory changes to the legal services sector were also likely to make law firms less reliant on claims management companies.

Kenny said this should not be read as a definite prediction on the LSB’s part, but he commented that ABSs were likely to make the market more competitive. “Claims management companies and other providers are likely to feel a degree of cost pressure, so people will be more hard-nosed about the cost of client acquisition,” he said.

The risk that a ban would push unethical practices underground was also recognised: “A ban could create perverse incentives which lead to more harmful behaviour, such as the payment of ‘under the counter’ inducement fees.

“A world where referral fees are invisible is a world where misbehaviour can take place,” Kenny added.

The report has been welcomed by the Solicitors Regulation Authority, with Richard Collins calling it “a very balanced document”.

“We’re glad it’s not a formulaic, prescriptive approach,” said Collins. “It focuses on what’s in the interest of consumers and on approved regulators having to deliver outcomes in respect of referral arrangements.”

Collins said the SRA would now go through the LSB guidance carefully, in particular the provisions around clarity and transparency, and supervision and enforcement in relation to marketing arrangements. He suggested consumer issues had been “well covered” in the new handbook, currently with the LSB for approval.

The SRA’s initial view, Collins continued, was that there no prima facie need for a ban on any of the segment falling under the SRA’s jurisdiction in the absence of evidence about consumer detriment.

The Law Society, on the other hand, which has been pressing for a ban, has expressed disappointment at the move, saying it was “a weak decision” and that the LSB had “failed to act in the interest of consumers”.

President Linda Lee said a ban on referral fees was needed to reduce pressure on legal costs and to avoid cases being bought and sold. But instead, she said, “the LSB has chosen a path which will involve complex regulation which in turn will only increase costs to the consumer.”

Sole practitioner and Law Society council member Nick Gurney-Champion said the report was “a complete muddle” and accused the super-regulator of “fudging the issue”.

“They have not grasped the issue of the effect of referral fees on the legal market,” he said. One major problem with placing the onus of regulation on the eight approved regulators, according to Gurney-Champion, is that this would lead to as many different rules. “A ban would be appropriate particularly in the conveyancing market, where the consumer is not given the information he needs at the time he is making a decision and therefore cannot make an informed choice.” He was also sceptical that the LSB’s new test for the assessment of effective frontline regulation and called for the regulation of estate agents.

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Regulators Procedures