It is only eight years since the ban on solicitors paying referral fees was finally lifted, writes Allison Woodisse. Referral arrangements had long-since been the profession’s worst kept secret. The 2004 Referral Code didn’t open Pandora’s Box, it simply acknowledged that the Box had been leaking for quite some time.
The decision to relax the referral fee ban in 2004 is often credited with being the catalyst for the explosion in claims management companies, television advertising and the rise of the much-disputed compensation culture. Mounting political and public pressure finally resulted in the Legal Aid, Sentencing and Punishment of Offenders Act 2012. This introduced a high-level statutory framework for the proposed personal injury referral fee ban (expected to be implemented next April).
It’s not yet possible to understand exactly how the ban will operate, for two reasons:
- the statutory framework will be implemented by frontline regulators such as the Solicitors Regulation Authority and Claims Management Regulator, who will need to consult on amending their existing codes of conduct; and
- certain powers are reserved to the Lord Chancellor to make secondary regulations
Who will be covered by the proposed ban?
The Act will apply to regulated persons. This includes persons authorised by the Claims Management Regulator, the Bar Council and Law Society (SRA) (LASPO, s 59).
Certain Financial Services Authority (FSA) authorised persons may also be included and the Lord Chancellor has power to extend the ban to persons authorised by other regulatory bodies. This is presumably to cater for the likelihood that other regulators will be able to regulate personal injury matters in the future.
What sort of claims will be covered by the ban?
The proposed ban relates to prescribed legal business, i.e., personal injury claims and any claim that is ancillary to a personal injury claim. This is officially defined as a business that involves providing legal services to a client relating to:
- any claim or potential claim for damages for personal injury or death
- any other claim or potential claim for damages arising out of circumstances involving personal injury or death
- other matters that the Lord Chancellor may subsequently prescribe by way of regulations
LASPO, s 56(4)
What will be prohibited?
The Act will prohibit:
- paying or receiving payment for referring the personal injury claim itself
- receiving payment in return for arranging for a third party to provide services to the client in connection with their personal injury claim, eg a medico-legal agency
Somewhat unhelpfully, the Act collectively refers to both types of payments as a referral fee, although most personal injury lawyers would consider the former to be a referral payment and the latter to be a commission payment. These are discussed in more detail below. (LASPO, s 57(7))
Referral payment: It will be a breach of the Act for a regulated person to:
- refer prescribed legal business to another person and be paid for the referral
- pay for a referral of prescribed legal business
This means it will be a regulatory breach to make or receive referrals of personal injury claims (including ancillary claims) in return for payment. As one might expect, the definition of referral is very wide; a referral will occur where:
- a person (other than the client)
- provides information that a provider of legal services would need
- to make an offer to the client to provide relevant services, ie any of its legal services
Commission payment: It is common practice in personal injury claims to introduce clients to third parties in return for a commission. This is particularly prevalent in relation to medical reports.
The 2011 SRA Code of Conduct already requires solicitors to account to clients for commission received as a result of their instructions. The new legislation takes this a step further; it will be a breach of the Act for a regulated person, when providing legal services in the course of a personal injury claim (or ancillary claim) to:
- arrange for another person to provide services to client, and
- be paid for making the arrangement
What is a payment? The definition of payment is relevant to the proposed prohibitions on both referral payments and commission payments. Once again, the definition is deliberately wide:
- any form of consideration
- whether any benefit is received by the regulated person or by a third party
- excluding reasonable hospitality
This definition is sufficiently wide to incorporate payments to unrelated third parties, such as a charity. There is no guidance on what may constitute reasonable hospitality.
How will the ban be implemented?
The ban will be implemented by relevant front-line regulators (including the SRA) who must make appropriate arrangements for monitoring and enforcing the Act. Breach of the Act will be a regulatory issue, punishable by the relevant front-line regulator.
Breach of the Act will not:
- be an offence
- give rise to any action for breach of statutory duty
- make anything void or unenforceable–except that a contract to pay a referral or commission payment in breach of s 56 is unenforceable
LASPO, ss 57(5)-57(6)
Will there be any loopholes?
The Act is far from watertight; a key potential loophole is woven into its very fabric.
The final shape and size of this loophole could vary, depending on the identity of the front-line regulator. This is because of each front-line regulator can make rules providing that a referral or commission payment will be treated as a referral fee unless the regulated person shows it was not made as a referral fee, but rather:
- as consideration for the provision of services, or
- for another reason
LASPO, ss 57(7)-57(8)
This somewhat back-to-front provision means that front-line regulators have flexibility to treat some referral and commission payments as being consideration for the provision of services, or as being paid for another reason–rather than as a referral fee. This is subject to an overarching power reserved to the Lord Chancellor to set a cap on the maximum figure a regulated person can pay as consideration for the provision of services; beyond this figure, any payment would be caught by the ban, regardless of any rules implemented by front-line regulators. (LASPOA, s 57(9))
The combined effect of the provisions makes it impossible to know how the proposed ban on referral and commission payments will work in practice. Different front-line regulators may have different ideas on what is not a referral fee, but rather:
- consideration for other services
- payment for another reason
We also do not know whether the Lord Chancellor intends to fix a cap on payments that can be made in consideration for other services and, if so, how that cap will be calculated.
Call for clarity
Referral fees were banned for a lot longer than they’ve ever been allowed. Those operating in the personal injury market before 2004 will remember that, notwithstanding the ban, it was common practice for claims management companies and, even some insurance companies, to charge substantial fees for other services, such as marketing costs, taking initial witness statements and other administrative activities.
The Act keeps the door wide-open for these activities to continue. It’s unlikely that front-line regulators will slam this door shut and bolt all the locks. The issue is how far they go towards pushing it closed. It will be a brave regulator who decides that every payment made in connection with the referral of a personal injury client is a referral fee. More likely, the battle lines will be drawn over what can be legitimately paid to third parties such as claims management companies in consideration of services such as marketing.
Implementation of this ban is less than a year away. In the meantime, law firms and claims management companies must be able to plan their businesses. Law firms specialising in referred personal injury claims are entitled to know in advance whether their source of work is really going to disappear, as there are fundamental decisions to be made about whether to sell or restructure their business. Claims management companies must decide whether they will need to invest in an alternative business structure (ABS) that is licensed to conduct personal injury claims or whether they can continue to refer claims to external firms, which has the benefit of transferring risk outside their organisation.
The SRA expects the firms it regulates to run their business effectively and in accordance with sound financial and risk management principles (SRA Principle 8). The sooner the SRA makes its intentions clear on how it intends to implement the referral fee ban, the sooner law firms specialising in personal injury work can do so.
On the 12 June 2012, the SRA launched a consultation process, starting with a discussion paper on the proposed referral fee ban for personal injury cases.
The SRA concedes that it cannot prevent a claims management company and solicitors firm joining forces as an ABS simply to avoid being caught by the referral fee ban.
The SRA has also given an early indication of its likely approach to enforcing the ban: ‘We do not believe that detailed rules would be consistent with outcomes-focused regulation’.
There is no suggestion that the SRA intends to make rules providing that a referral or commission payment will be treated as a referral fee unless firms show it was made as consideration for the provision of services or for another reason. It appears that the SRA will either (LASPO, ss 57(7)-57(8)):
- be silent on this point, or, at most
- impose a non-compulsory requirement (indicative behaviour) that firms should have effective systems to ensure any payment made for services such as marketing do not amount to the payment of unlawful referral fees
Either approach will leave considerable room for interpretation and therefore manoeuvre for both the SRA and individual firms.
Of course, none of this is yet written in stone and this is simply the first salvo in what is likely to be a highly contentious consultation process. The SRA’s final intentions will become more clear over the coming months; key consultation dates are shown below.
Discussion paper consultation opened
|Deadline for responding to discussion paper||31 July 2012|
Formal consultation process on SRA’s proposals
|September to December 2012|
|Final version of SRA’s regulatory requirements published||Early 2013|
|Implementation of ban||April 2013|
There are nine months until the referral fee ban comes into force. It seems the consultation process will take six months of this, leaving personal injury firms only a few months to assess the final impact of the ban and make potentially business-critical decisions.
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