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Doubling disclosure could clean up 'murky' referral fees

4 October 2010

Boosting transparency of referral fee arrangements could bring a welcome change of attitude in the market, according to a leading legal services professor.

The comments came as the Legal Services Board announced it would double disclosure requirements rather than opting for an outright ban or an open ‘free for all’ market.

By following the advice of the LSB’s consumer panel for heightened transparency, the super-regulator has sparked criticism that it will add unnecessary costs and bureaucracy to the process.

“Consumers are unlikely to be significantly influenced by greater transparency,” said legal services professor Richard Moorhead, of Cardiff University, adding: “But…there is the potential for transparency about the actual agreements to have an impact independent of what consumers think or do. Transparency has the potential to open up this murky area to far greater scrutiny by regulators and others.”

Under the terms of the board’s latest consultation (see ‘Referral fees to stay subject to greater disclosure’, solicitorsjournal.com, 29 September 2010) shortcomings in the current system would be remedied by introducing a dual transparency requirement.

Lawyers will have to tell clients about the amount of the fee, who it is paid to and for what service. They will also have to tell clients they have a right to shop around for an alternative service provider instead.

In addition, all agreements between introducers and lawyers will have to be in writing. All approved regulators will be responsible for collating and publishing these agreements.

“As a regulator we are committed to proportionate intervention,” said LSB chairman David Edmonds (pictured). “Our hypothesis is that neither an outright ban nor a laissez-faire free for all would be appropriate.

“Clear obligations on transparency would preserve the beneficial impacts of the arrangements, while addressing the conditions that underpin concerns about consumer choice and transparency.”

Solicitors have been allowed to enter into referral fee agreements since 2004 when a previous sector-wide ban was lifted.

Since then referral fees have been the subject of controversy, with many saying they undermined lawyers’ independence.

Research on behalf of the LSB has indicated that consumers had benefited from lower prices where there was an element of referral and that quality of service had not been affected.

Against this background the board said there was no evidence justifying a ban, but it also acknowledged that existing disclosure arrangements did not always work effectively.

“Disclosure is a crucial part of ensuring that consumers know the details of the deal they are getting. Yet there is evidence that in many cases these rules are not complied with,” the consultation said.

Rebuffing claims that the move constitutes over-disclosure, Moorhead added: “The debate about the ethics and public interest in relation to these arguments may become both more informed and more contested. This is likely to have a significant influence on behaviour in a way that consumer-focused disclosure will not.”

The consultation ends on 22 December and the board said it would reach a final conclusion on referral fees in early 2011.

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