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Firms have "nothing to fear" from abolition of referral fees

10 November 2009

Referral fees should be banned across the whole of the legal services sector, the Law Society has said in an unexpected policy U-turn.

Until now the society’s position was that it was “against the best interests of the profession for solicitors to be banned unilaterally from paying referral fees”, encouraging the development of a market now worth around £240m a year.

But, following a vote in council last Wednesday, the Law Society will be making representations to the government and Legal Services Board “encouraging the banning of referral fees by all providers of legal services”.

The motion, put forward by Sue Carter, council member representing the Sole Practitioner Group, was passed by 41 votes in favour, with 11 against – a result which one solicitor said “finally reflected the view of the majority of the profession”.

The move comes as many in the profession are bracing themselves for the arrival of non-lawyer owned businesses into the legal services sector, potentially threatening the survival of thousands of smaller firms.

Larger firms keen to generate volume, particularly in the personal injury market, have taken on more and more work from claims management companies, cutting out local solicitors from ordinary sources of work.

“The referral fee arrangements have distorted the market in favour of larger firms, and the Sole Practitioner Group feels that an appropriate balance would be restored both in relation to geographical spread of legal services, transparency and freedom of choice to the client,” Carter told Solicitors Journal.

“If you’re a claims manager you will probably choose to do business with the firm that pays the highest referral fee, potentially forcing more vulnerable firms out of business,” she added.

There have also been concerns that a ban could threaten some of the smaller firms that rely in part on income from bought-in work, but the sole practitioner commented that “many firms which pay referral fees do so reluctantly, merely to maintain turnover”.

She suggested that all firms, large and small, were permitted to advertise for clients.

Nick Gurney-Champion, residential conveyancing council member who seconded the motion, added that firms which provide an efficient, cost-effective service had “nothing to fear from the abolition of referral fees”.

Carter said the ban would bring an end to serious ethical problems. “Direction of work by claims managers effectively reduces the client’s choice of legal service suppliers. In addition, the cost of the referral fee is a direct expense to the firm of solicitors involved, thereby increasing overheads and the average case cost.”

Law Society chief executive Desmond Hudson confirmed the Law Society had informed the Legal Services Board of this move. “We hope that the LSB and its consumer panel look at this matter seriously,” he said.

A Legal Services Board spokesperson said the super-regulator’s business plan makes clear that it was “sympathetic in principle to the views of some stakeholders, including the Law Society, that there is a need for a consistent regulatory approach across the sector as regards referral fees”.

It will be the first issue the LSB Consumer Panel will be asked to advise on, he said, after which the board will work with the approved regulators to “find proportionate remedies to any identified risks”.

The Law Society’s council meeting on Wednesday also discussed the Hunt report on the regulation of the legal services sector as Part 2 of the agenda, in private. Some of the discussions considered Lord Hunt’s recommendations to create an independent corporate board for the Law Society, overseeing the representative and regulatory arms.

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