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Referral fees to stay subject to greater disclosure, LSB suggests

29 September 2010

Referral fees should remain subject to transparency and “active regulatory oversight” the Legal Services Board has said in its latest consultation.

In a discussion document released this afternoon the LSB has ruled out both an outright ban and an open ‘free for all’ market.

The super-regulator instead favours retaining referral fees but toughening disclosure requirements.

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

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

The move follows the conclusions of the board’s consumer panel in May (‘Consumer panel backs referral fees’) which came out in favour of keeping referral fees but called for greater transparency and improved regulation.

In this latest consultation the LSB says changes already underway in the market have made firms realign the way they source clients and that the advent of ABSs would lead to further adjustment in this respect.

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 that details of the deal they are getting. Yet there is evidence that in many cases these rules are not complied with,” the document says.

It continues: “The disclosure and compliance problems identified exacerbate information asymmetries and other complexities in the legal services market – so undermining confidence.”

The board proposes to remedy the shortcomings of the current system 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 that 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.

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

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.

Separate research carried by Charles River Associates, consultants for the LSB, had found that consumers were not being damaged by referral fees in conveyancing and personal injury (‘Consumers not being hurt by referral fees, LSB consultants say’).

“Greater transparency, combined with tough action against rule-breakers, is needed to ensure that referral fees work in the interests of consumers,” she said.

The board’s own research 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.

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