Supervision and enforcement strategy for the ban on referral fees

 

25 March 2013

About this strategy

  • 1.

    This strategy sets out how we intend to monitor and enforce compliance with the ban on the payment of referral fees in personal injury cases (‘the ban’), introduced in sections 56 - 60 of the Legal Aid Sentencing and Punishment of Offenders Act 2012 (LASPO). The ban is effective from 1 April 2013. This strategy sets out how we will monitor arrangements for the referral of work in personal injury cases with a view to identifying and responding to evidence of practice that is inconsistent with LASPO, our Principles or the Outcomes in the SRA Code of Conduct 2011.

  • 2.

    As you are required to comply with the law you should carefully read for yourself the relevant sections of LASPO.

  • 3.

    This strategy has been developed so as to be consistent with our overarching enforcement strategy.

Background

  • 4.

    The main focus of our action is protection of the consumer as well as the wider public interest in ensuring that, by complying with the law, confidence in those who deliver legal services is maintained. One of the objectives of outcomes-focused regulation is to enable the regulated community to take responsibility for their own compliance with legal and regulatory requirements. This allows the SRA and the regulated community to have a constructive relationship which encourages compliance and leads to changes in behaviour where appropriate You will therefore have to satisfy yourself that any arrangements you have are not only compliant with the law and the outcomes set out in Chapter 6 and 9 of the SRA Code of Conduct 2011 but also with the overriding Principles such as acting with integrity, not allowing your independence to be compromised and acting in your client’s best interests.

  • 5.

    As a risk-based regulator, the SRA focuses on the risks to consumers and the regulatory objectives 1 posed by:

    • activities undertaken by firms and individuals;
    • the operation of the legal services market; and
    • wider external factors such as political or economic change.
     
  • Firms which have in place arrangements for the referral of work in personal injury cases may pose a risk to the regulatory objectives, specifically:

    • improvement of access to justice;
    • the protection and promotion of the interests of the consumer;
    • the protection and promotion of the public interest;
    • encouraging an independent, strong, diverse and effective legal profession; and
    • the promotion and maintenance of adherence to the professional principles.
     
  • 1 The regulatory objectives are set out in section 1 of the Legal Services Act 2007

  • 6.

    The SRA Handbook sets out the 10 core overriding Principles which must be adhered to by all those we regulate, together with a number of mandatory outcomes in the SRA Code of Conduct 2011. The outcomes set out in Chapter 6 and 9 of the Code apply to all referral arrangements. The most relevant provisions from the SRA Handbook are:

    SRA Principles

    1. uphold the rule of law and the proper administration of justice;
    2. act with integrity;
    3. not allow your independence to be compromised;
    4. act in the best interests of each client;
    5. ...
    6. behave in a way that maintains the trust the public places in you and in the provision of legal services;
    7. comply with your legal and regulatory obligations and deal with your regulators and ombudsmen in an open, timely and cooperative manner;
    8. run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles;
    9. ...
    10. ...

    SRA Code of Conduct 2011

    Chapter 6 - Your client and introductions to third parties

    Outcomes

    You must achieve these outcomes:

    • O(6.1)

      whenever you recommend that a client uses a particular person or business, your recommendation is in the best interests of the client and does not compromise your independence;

    • O(6.2)

      clients are fully informed of any financial or other interest which you have in referring the client to another person or business;

    • O(6.3)

      if a client is likely to need advice on investments, such as life insurance with an investment element or pension policies, you refer them only to an independent intermediary.

    • O(6.4)

      you are not paid a prohibited referral fee.

    Chapter 9 - Fee sharing and referrals

    Outcomes

    You must achieve these outcomes:

    • O(9.1)

      your independence and your professional judgement are not prejudiced by virtue of any arrangement with another person;

    • O(9.1)

      your clients' interests are protected regardless of the interests of an introducer or fee sharer or your interest in receiving referrals;

    • O(9.3)

      clients are in a position to make informed decisions about how to pursue their matter;

    • O(9.4)

      clients are informed of any financial or other interest which an introducer has in referring the client to you;

    • O(9.5)

      clients are informed of any fee sharing arrangement that is relevant to their matter;

    • O(9.6)

      you do not make payments to an introducer in respect of clients who are the subject of criminal proceedings or who have the benefit of public funding;

    • O(9.7)

      where you enter into a financial arrangement with an introducer you ensure that the agreement is in writing.

    • O(9.8)

      you do not pay a prohibited referral fee.

     
  • 7.

    The mandatory outcomes are supported by a number of indicative behaviours that set out the types of behaviours which are likely to demonstrate whether or not the outcomes have been achieved. A definition of 'prohibited referral fee' and 'paid' are included in the SRA Handbook Glossary.

  • 8.

    In addition, we have issued separate guidance which sets out our interpretation of the relevant sections of LASPO as well as some scenarios which should be of assistance when considering if a particular type of arrangement contravenes the ban. The guidance, will be periodically reviewed and updated.

Supervision/Monitoring

  • 9.

    The ban will inevitably bring with it issues which pose a risk to the regulatory objectives. We have identified some specific risks in the SRA Risk Index:

    • financial difficulty - it is envisaged that there will be a reduction in the volume of personal injury work referred to law firms. Firms which derive a significant proportion of their turnover from personal injury referrals could be affected heavily by the ban. Firms will need to consider whether their financial stability is at risk and what systems and controls need to be in place to continually monitor their financial stability. Where there is a particularly high percentage of cases received from referrers, this monitoring may include regular consideration of whether it is financially viable for the entity to continue in business. The SRA should be informed where there is a significant impact on a firm’s financial viability;
    • failure to act with integrity and a lack of independence – arrangements which are financially valuable to firms can pose a risk to a firm's integrity, professional judgement and/or independence. Paying referral fees in personal injury cases will no longer be an option and care should be taken to check arrangements carefully. The SRA will consider the substance of any arrangements as well as their form;
    • firm structure - it is envisaged that some firms will look to reconfigure their business model and/or apply to become an ABS. Firms currently regulated by the SRA are required to notify us of the proposed changes to their structure and all ABS applications will be assessed on a case by case basis. Where the SRA considers that changes to a business and/or proposals to become an ABS fail to meet the regulatory requirements, authorisation will not be granted.
     
  • 10.

    In all circumstances, firms will need to determine that they are complying with the Principles and achieving the Outcomes.

  • 11.

    Firms with arrangements in place for the referral of personal injury work will need to consider what impact the ban has had on their business and any associated risks. Firms will need to have in place appropriate systems to mitigate any risks and ensure compliance with the SRA's regulatory provisions.

  • 12.

    As a risk-based regulator with limited resources we target our action at those who present the highest risk to consumers, the public and the regulatory objectives2.

  • 13.

    For example, where we identify high risk issues we may:

    • use our formal investigatory or regulatory powers; including requiring the production of information (including documentation) and attendance of individuals at formal interview;
    • work alongside other approved regulators with a view to sharing information and concerns and identifying firms which look to contravene LASPO/our regulatory provisions;
    • engage with firms either remotely or by way of visits to encourage them to make changes required to comply with the ban;
    • enter into regulatory settlement agreements, which may include undertakings to change behaviours;
    • take enforcement action by, for example, referring cases of persistent and/or wilful disregard of the requirements for formal disciplinary sanction.
     
  • 14.

    In lower risk areas, we are likely to use more appropriate tools for monitoring compliance such as questionnaires designed to enable firms to assess whether their arrangements comply with LAPSO and our regulatory requirements. Firms may be required to submit confirmation of their assessment to us.

  • 15.

    These tools will be used in a proportionate, consistent and targeted manner and action may be taken in conjunction with or referred to another regulator where necessary.

2 Section 28(3) of the Legal Services Act 2007 requires approved regulators to take action only in cases where it is needed and that all regulatory activity should be transparent, accountable, proportionate, consistent and targeted.

Enforcement

  • 16.

    Our overriding enforcement strategy makes it clear that not all regulatory failures will require enforcement action. It sets out the factors that we will consider on a case by case basis when deciding if action is required. We will look at the substance of an arrangement rather than just its form and focus on those arrangements which pose a real risk to the public interest.

  • 17.

    Our action will be fair, targeted, proportionate and transparent. We have a wide range of tools available to us where regulatory action is appropriate. Decision making guidance in respect of each has been published on our website.

  • 18.

    These include:

    • findings but no action;
    • rebukes;
    • fines levied by the SRA of up to £2000 for law firms or up to £250m for ABSs;
    • conditions on an authorisation to practise;
    • revocation of authorisation to practise;
    • referral of the individual or entity to the Solicitors Disciplinary Tribunal (SDT) which has the power to issue an unlimited fine or suspend or strike from the roll (individuals involved in ABSs can also be removed from practice by disqualification);
    • intervention. and
    • in most cases, a direction to pay our costs for the investigation would also be made.
     
  • 19.

    The regulatory outcome will depend upon the seriousness of the misconduct, which will include what harm has been caused.

  • 20.

    The following factors are indicative of more serious misconduct:

    • significant detriment to the interests of the client;
    • a failure to take steps to assess whether payments made in respect of a referral arrangement are prohibited by LASPO;
    • a failure to remedy the breach once identified;
    • the passing of unnecessary costs, such as artificially inflated charges or referral fees, to clients or third parties such as defendants;
    • repeated contraventions of the ban;
    • taking steps to disguise or hide payments in an attempt to pay or receive referral fees contrary to LASPO, which may be evidence of dishonesty;
    • an intentional or reckless contravention of the provisions set out in LASPO.
     
  • 21.

    When taking enforcement action we will aim to deter those who have breached the Principles and failed to achieve the Outcomes from doing so again and to deter others in a similar position. For the most serious of cases where firms or individuals are deliberately flouting our requirements and therefore the law, removal from practice may be appropriate.

All decisions may be published in line with our publication policy.

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