SRA will not issue 'safe harbour' guidance on referral fee ban

The Solicitors Regulation Authority has rejected calls from the profession for a specific regulatory compliance policy in relation to the forthcoming ban on referral fees in personal injury cases.

The ban, due to come into effect in April next year (2013) with the entry into force of the Legal Aid Sentencing and Punishment of Offenders Act, has left the profession and legal bodies divided over how it could best be enforced.

The SRA’s preferred approach, outlined at the start of the consultation, is for a set of mandatory outcomes supported by indicative behaviours rather than for prescriptive rules which it said would go against the principle of OFR.

The regulator made its position clear in its initial assessment of the responses to its consultation on the implementation of the ban, saying “it is not the function of the SRA to provide regulated persons with ‘safe harbour’ guidance’.”

One of the respondents, which included 11 law firms plus several solicitor organisations, said “unless there is extremely full and easy to understand guidance and clarity provided it is difficult to see how any law firm can formulate a proper business plan to stay in this sector”.

Another argued it was “appropriate for the profession to be given clear guidance illustrating what is believed by the regulator to be permitted and what is caught by the Act”.

While acknowledging that law firms looked for “clearer, prescriptive guidance and confirmation of what will be deemed acceptable”, the SRA declined to depart from the principles of OFR.

Such guidance, it said, “would represent a move away from outcomes-focused regulation to some extent. For this reason defined mandatory outcomes and indicative behaviours that reflect the provisions of LASPO will most likely form the basis of our approach.”

In a concession towards greater, immediately usable rules, the SRA said it would “seek to develop case studies and learning tools to assist compliance” and that it would consult further on how specific outcomes could be achieved.

At this stage however the SRA would only agree to publish guidance on its interpretation of the types of bans falling within the scope of the Act, a definition which it said was “fairly wide ranging”.

In its initial assessment of the 26 responses, the SRA said it would work closely with other regulators, including the Claims Management Regulator, LeO, the Financial Services Authority and the Office of Fair Trading, to ensure the ban would be enforced consistently.

One suggestion was for a cross-organisational super-memorandum of understanding between regulators that would allow for the sharing of information and deal with competing organisational priorities.

Respondents raised further concerns over joint marketing schemes and what constitutes “services for which payment is made”, in particular in relation to joint marketing schemes.

Warning that the drafting of LASPO made some schemes vulnerable to being in breach, the SRA said the onus remained on firms “to evidence that payment made for marketing/advertising services remain reasonable” and that “clear attempts to hide such fees in complex or hidden arrangements will present a risk to our regulatory objectives”.

Another set of responses voiced concerns over the survival of smaller practices who rely on referrals for their business because they are unable to “promote their businesses individually in a highly competitive marketplace”.

The SRA acknowledged some firms may have to merge as a result, or form an ABS with referrers – an option which Admiral is reported to be considering – to stay in business.

It said referrals in such circumstances would be internal and it would “not consider ABS creation as a way of avoiding the ban”.

Talking to Solicitors Journal last year, SRA chief executive said a complete ban may be difficult to enforce but that if that was the route parliament chose, that making it breach of the ban a criminal offence would be the most effective route.

Referral arrangements and referral fees are dealt with specifically in chapters 6 and 9 of the Code of Conduct.

Firms must also comply with the 10 SRA principles, including the need to act with integrity, not allow their independence to be compromised, and act in the best interests of each client.

The new handbook lists outcomes relating to referrals, with a focus on independence, clients’ best interests and transparency.

It requires solicitors to ensure that “their independence and professional judgement are not prejudiced by virtue of any arrangement”, that “clients’ interests are protected regardless of the interests of the introducer", and that “clients are in a position to make informed decisions about how to pursue their matter”.

Clients must also be “informed of any financial benefit or other interest which an introducer has in referring the client to the solicitor”.