How do Referral Fees work?

 

Yes, I do.  The Solicitors Practice (Payments for Referrals) Amendment Rules 2004 were signed into existence by the Master of the Rolls on 9^th March 2004, and take effect from that date.  They insert a new Section 2A into the Solicitors’ Introduction and Referral Code 1990.  They allow for a solicitor to make a payment to a third party, for the introduction of clients, in certain specified circumstances.

 

Who knows?  The Law Society’s Council has been deeply divided on the issue for a long time, and it seems the profession may be as well.  In the broadest of terms, it seems that Personal Injury lawyers will welcome it; but conveyancers won’t.  It’s going to have to be kept under review.

 

 

Well, they certainly should take notice.  Part of the problem with the old rule was that it was very difficult to determine what was or was not within the prohibition, so enforcement was very difficult.  Now, things should be much clearer, and it should be easier to take action against firms which don’t comply with the new procedures.  Hopefully, however, they’ll find they can achieve what they want to within the new rules, and the safeguards for clients which have been built into it.

 

Well, I’ll start you off, but if you want chapter and verse, you can get it from http://www.lawsociety.org.uk/dcs/pdf/professional_feesharing.pdf  That gives you the appropriate guidance from the Society’s Standards Board, as well.

 

 

Part of the object of all this has been to try to find a way to weed out any cowboy introducers – after all, the profession’s suffered enough from them in the last few years.  The reputable ones should not have any difficulty in complying with the new rule.  They do however have to agree, with any firm operating with them, to comply with the terms of the overall Code.

 

 

First off, they’re limited as to the ways in which they can make contact with the prospective client.  They have to observe the same restrictions as to publicity methods as we do, such as avoiding any misleading or inaccurate publicity.  In particular they’re forbidden from ‘cold calling’ private individuals.  Then, once they’ve made contact, they’ve got to provide all relevant information about the arrangement to the prospective client, before they actually make the referral.  It’s in your direct interest to make sure they do comply, because it remains a breach by you of the Publicity Code if you allow any third party to publicise your practice in any way that is contrary to the Code.

 

 

There’s nothing wrong if they want to try to agree some matters with you as to how well the client will be dealt with.  For instance, they may want to agree some service standards with you, so you are committed to certain response times, or methods of communication with the clients, or with them.  This might extend to requiring the use of a specific IT platform, e.g. to ease passing of data between the introducer and all those firms to which it makes introductions.  They might insist on certain minimum training standards.  All of these are things which can only improve the client’s position, and need not be disclosed.

 

They must agree that they won’t do anything to influence or constrain your professional judgement.  In other words, your professional duty to remain independent and serve the best interests of the client remains intact.  So, quite naturally, you couldn’t accept any suggestions that you might withhold information from the client; or give advice knowing it not to be in the client’s best interests; or mislead anyone.  The mere fact that the client might be told of such proposed limitations would not get you off the hook, for something as fundamental as this. 

 

There might be.  There could be a middle classification of constraints which could be proper if they are disclosed, but not if they are kept secret.  The guidance notes suggest these would include things like agreements with an introducer / funder as to the progress of a matter, e.g. that reports needed to be given during a matter, or that Court proceedings would not be issued without the funder’s consent.  As it is the funder’s money, limits on such payments as expert fees could be agreed, if disclosed.  Where you would still have to exercise professional judgement, however, is if in a particular case you believed it was against the client’s interests to accept those limitations, such as if they needed a higher-cost expert, whose participation you believed to be vital to success.  Clearly you would then have to discuss other funding options with the client, if you could not get the funder to waive the limit.  One particular matter which will be important in many cases is the funding of an insurance policy, particularly in a ‘no win, no fee’ case.  There, you can accept an introducer’s stipulation as to the particular policy to be bought, provided that you are satisfied that it is appropriate, and you tell the client that this forms part of the deal with the introducer.

 

 

If you suspect there has been any breach by them, you’ve got to take all reasonable steps to put the problem right.  If the breach becomes persistent, then you’ve got to end the arrangement, so far as any further new clients are concerned.

 

 

You’ve got to provide the client with all the relevant information about the arrangement.  What’s more, you’ve got to do it right at the start of matters, i.e. as soon as you get the referral, and before you accept instructions.  What you have to disclose to each of them will depend on the arrangement you have, but in any event it will include the amount you are paying.  Where that is on a case by case basis, you need to let the client know what that amount is.  If, on the other hand, you pay an aggregate monthly fee, you need to tell that client what the nature of the arrangement is and, if he asks for more detail, you should do your best to provide it.  After all, you mustn’t forget that you are in a fiduciary relationship to the client, and you mustn’t do anything to mislead the client.  Any non-financial details about the arrangement, which are relevant to the client, should also be disclosed.

 

 

Not if you get your systems set up properly.  The idea is that the client shouldn’t feel embarrassed or trapped into instructing you.  So, firstly, he or she should have had the position laid out for them by the introducer before they even contact you.  Then, when contact is made, you should have a standard written statement that can be sent to the prospective client before you even see them.  If that’s not possible, and an interview has to be arranged at short notice, then you should discuss all this with them right at the start of the interview, so they can walk away if they want to.  Then confirm it in writing later.  It really is a matter of being systematic.  What it does require, of course, is that you and all your staff are meticulous about finding out, when a prospective client rings up about a problem of a relevant type, where their introduction has come from.  By the way, in order to check that the introducer is playing ball, you should check with each client just what they have had from the introducer, and keep a written note of that.  If that doesn’t conform with what you have agreed, with the introducer, as to what they should be providing, then you know you’ve got a potential problem.

 

No.  It doesn’t apply to if, at the time of the referral, you intend to act for the client on a publicly funded basis, or in any form of criminal proceedings.  There’s still a bar on payment for referrals in such work.  If that intention isn’t there at the outset, but later on there is an unexpected criminal or publicly funded dimension, that doesn’t cause a problem, so long as quite genuinely no-one thought it would intrude at the outset.  You’d do well, in that situation, to keep something on file to show why it was unexpected.  Oh, and it doesn’t apply to cross-border work within the EU at all.

 

 

You may not.  The rule bites on any ‘payment’, and specifically provides that ‘payment’ includes any form of consideration.  In other words, you can’t escape the application of the rule by dressing up the payment as something else, like a marketing fee, or a panel subscription.  It won’t exempt you, either, if you provide a service to the introducer, rather than making a payment.  Nor can you get out of it by using an intermediary, so that payment isn’t gong direct from you to the introducer.

 

On the other hand, there is a specific exception for ‘normal hospitality, disbursements, or normal business expenses’.  What comes within that exception is going to be a matter of common sense and proportionality.  The odd lunch wouldn’t count, but underwriting the introducer’s weekly bill at a three-star Michelin restaurant would!  Equally, the ‘normal business expenses’ exception covers the situation where you have a normal business relationship with someone regardless of introductions, but they happen to give you introductions from time to time.  Illustrations given in the guidance are where you get introductions from either the insurer who looks after your office, or the accountant who does your books.

 

The point really is that you shouldn’t need to try to look for complex ways round the rule, since all that is being secured by it is the provision of proper information to the client, and you would want to do from the point of transparency anyway.

 

 

You need to keep your finger on the pulse.  You should make sure that you, as the person in charge, are involved in discussions leading to any such agreement, to make sure it is compliant with the rule.  You should have a copy of all arrangements and agreements, in case the Law Society or anyone else properly interested want to check the position.  You should make sure that all those who will be responsible for operating any introduction system are fully trained as to its implications and requirements; and you should be monitoring their performance, and that of the introducers, to make sure no problems are cropping up.

 

 

You did indeed.  I’ll tell you about them next time.

 

 

 

Simon Young MBA is a solicitor and management consultant.

 

syoung@eurobell.co.uk