This subject has long been controversial. When formal arrangements for the introduction of business were first permitted by the Solicitors’ Introduction and Referral Code 1990, debate raged about whether it was ethical for solicitors to pay for referrals or have some form of fee sharing arrangement with introducers of business. When payments for referrals were finally permitted, the whole debate was reignited when in 2011 the government decided to crack down on the so called “compensation culture” which resulted in the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO). LASPO banned the payment of referral fees in respect of claims for personal injury and death and put responsibility for policing the ban onto the relevant regulators, including the SRA. This article will, therefore, look first at how referrals generally are now regulated and, secondly, at how the LASPO ban applies.
How referrals and fee sharing are currently regulated
The starting point is the 2019 SRA Principles. As solicitors are becoming increasingly aware through the SRA’s guidance notes and warning notices and the SDT judgments, the SRA views all behaviour through the prism of the Principles. Of particular relevance to referrals are Principles 3 (independence) and 7 (acting in the best interests of each client). The main danger inherent in referral arrangements has always been that over reliance on a source of work can lead to a firm being manipulated by an introducer to the detriment of the clients. This was evidenced by the miners’ compensation cases twenty years ago. In their eagerness to obtain this lucrative work stream, some firms agreed to make payments to the unions out of their clients’ compensation payments which should never have been made and were clearly not in the clients’ best interests. This also inflicted huge reputational damage to the profession.
Early versions of the Introduction and Referral Code required firms to conduct a review of any referral arrangement where more than 20% of the firm’s work came from a single source to check that the introducer was not, in fact, undermining their ability to give independent advice to their clients. This level of detail no longer exists in SRA regulation but it might be something that firms could usefully monitor where they are economically reliant on limited sources of referrals to help demonstrate that their independence is not impaired.
The detail of how referral arrangements are now regulated appears in the 2019 Codes of Conduct (for both individuals and firms) which, in line with the SRA’s current regulatory approach, is minimalist. This makes clear that payments for referrals are permitted except where (a) the clients are the subject of criminal proceedings and (b) LASPO applies (on which more later). These are not new prohibitions.
One important change is that the Codes treat referrals and fee sharing without any real distinction between the two. The provisions talk about “financial or other interests” and the need for clients to be informed about referrers having any such interests in making an introduction. The emphasis, therefore, is on transparency where there is any sort of financial or other arrangement that gives a firm a benefit.
The provisions are set out in standard 5.1. (Code for Individuals). They require that:
- Clients must be informed about any “financial or other interest” which an introducer has in making the referral to you – also of any financial interest, such as a commission, you have in referring a client to a third party.
- Clients must be informed of any fee sharing arrangement. (This would include, for example, situations where one fee is quoted to cover work done by the solicitor and the introducer.)
- Any fee sharing agreement must be in writing.
- No payments must be made for the referral of criminal cases.
- Clients referred must not have been acquired by means which would breach SRA regulatory arrangements (such as through unsolicited approaches which would breach standard 8.9).
The Codes give no indication of when or how clients must be told about any referral fees and fee sharing arrangements. It must be assumed that, as previously, this should be at the outset of the relationship so that clients can decide if they want to proceed on that basis. Firms would normally give this information in their terms of business and on their websites.
LASPO – and its ban on referral fees
The provisions are set out in sections 56 and 57 of LASPO. Section 56 sets out the ban on referral fees in cases involving personal injury or death and explains how it will operate and section 57 requires regulators to enforce the ban.
When it came into force, section 56 immediately caused difficulties over its interpretation. This has largely centred on section 56 (5) which defines a referral for the purposes of the Act. It says that there is a referral if:
- a person provides information to another,
- it is information that a provider of legal services would need to make an offer to a client, and
- the person providing the information is not a client.
If there is no “referral”, a referral fee can be paid.
Claims management companies, insurers and solicitors were quick to appreciate this. As a result, a common practice known as the “hot key transfer” has been adopted by many firms doing high volume personal injury work which enables referral fees to be paid. Typically, where an individual confirms that they want to be put in touch with a firm to pursue their claim, the introducer will transfer their call to the firm without any introductory information, with the individual being required to give their name and all personal details directly to the firm.
The SRA has concurred with this interpretation of the Act and there is guidance on its website explaining its views on the LASPO ban and how it applies – https://www.sra.org.uk/solicitors/guidance/prohibition-of-referral-fees-in-laspo-56-60/.
A final issue is what constitutes a “payment” where there is a “referral”. Section 56 (8) makes it clear that it will include any form of consideration and will also include payments made to third parties. There is a “get out” under section 57 (8) if it can be demonstrated that the fee was for the consideration of services or for another reason. The SRA takes the view that any payment for services must realistically reflect the work done.
Evidence of compliance
The issue of referral fees is considered high risk by the SRA. It has issued a warning notice – https://www.sra.org.uk/solicitors/guidance/referral-fees-laspo-sra-principles/ and it has carried out thematic reviews on firms conducting personal injury claims. Further reviews are likely. These are highly intrusive and firms doing personal injury work should be in a position to demonstrate compliance (standard 2.2 of the Code for Firms requires the keeping and maintenance of records for this purpose). The SRA will check files, listen to phone calls, and expect to see records of referrals and written agreements of referral arrangements. This also means that staff should be well trained on meeting LASPO and the Code requirements. Be prepared!
Co-authored by Bronwen Still, Solicitor Consultant with Jayne Willetts & Co Solicitors & Director of Infolegal Limited