Referral fees, LASPO and the SRA Principles
Issued on 11 October 2013
Who is this guidance relevant to?
This warning notice is relevant to all practitioners who have referral arrangements for personal injury work. It reminds practitioners of the need, when entering into such arrangements, to consider not only whether they may be in breach of the ban in the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO), but whether they are able to comply with their regulatory obligations, in particular the SRA Principles and the Outcomes in the SRA Code of Conduct 2011 ("the Code").
Whilst this notice does not form part of the SRA Handbook, the SRA may have regard to it when exercising its regulatory functions.
We know that the ban on referral fees has raised difficult issues in relation to its application and interpretation. We are also aware that, because of the wording of LASPO, it is possible for firms to have arrangements that involve the introduction of personal injury work without being in breach of LASPO. We are concerned, however, that in setting up arrangements in a way that does not breach LASPO, firms are failing to consider their wider duties to their clients and others, and in doing so may be breaching the Principles or failing to achieve the Outcomes. Examples include:
- agreeing with an introducer to deduct money from clients' damages;
- inappropriate outsourcing of work to introducers;
- referrals to other service providers which are not in the best interests of clients;
- failure to properly advise clients about the costs and how their claim should be funded; and
- lack of transparency about the arrangement.
The most relevant Principles in relation to referral arrangements are that you must
- uphold the rule of law and the proper administration of justice;
- act with integrity;
- not allow your independence to be compromised;
- act in the best interests of each client;
- provide a proper standard of service to your clients; and
- behave in a way that maintains the trust the public places in you and in the provision of legal services.
As well as the outcomes requiring practitioners to comply with LASPO (outcomes 6.4 and 9.8), chapters 6 and 9 of the Code include outcomes in connection with referrals to and by your firm, dealing with issues such as independence, transparency and the best interests of clients. These will apply in respect of any referral to or by your firm that is not prohibited by LASPO. You will also need to ensure that you achieve the outcomes relating to issues such as client care, conflict of interests, confidentiality and publicity.
Deductions from clients' damages
Some claims management companies ("CMCs") are seeking to charge clients a proportion of their damages in return for being referred to a suitable law firm and/or for other claims management services. In some cases firms are being asked, as part of their agreement with the CMC, to deduct these payments from the client's damages or even to forward the client's damages to the CMC. This type of arrangement can pose various risks to your ability to comply with the Principles.
Firstly, where the arrangement is not in the interests of your client, you will need to consider whether your ability to advise the client about the agreement they have entered into will be impaired by your relationship with the introducer. The Solicitors Disciplinary Tribunal has on a number of occasions criticised solicitors for failing to give such advice to their clients and for acting where their own commercial interests in a referral arrangement conflict with the interests of the client.
Money can only be deducted from a client's damages with the client's informed consent. Sending a client's damages to a third party introducer would also require the client's consent, but is unlikely ever to be in the client's interests.
In addition, this type of arrangement could place the introducer in breach of LASPO and you should not enter into any arrangement that would assist a third party to breach the legislation.
Outsourcing/paying for services
Some firms have arrangements that involve the introducer carrying out a certain amount of work on the client's matter and the firm paying the introducer for carrying out this work.
Provided the payment is for a genuine service and is reasonable in all the circumstances, such a payment may not breach LASPO. However, before entering into such an arrangement, you will need to consider carefully whether it is appropriate for the introducer to be carrying out such work. Failure to do so may compromise your ability to act in the best interests of your clients or to provide a proper standard of service. The work may, for example, include advising the client on the appropriate means of funding their matter, explaining and signing the client up to a conditional fee agreement or damages-based agreement. You have a duty to ensure that your clients receive sufficient information to make informed decisions about their matter and the way it will be handled. In our view, outsourcing this work, or relying on a third party to provide the necessary information to the client, represents a significant risk to your ability to achieve the relevant outcomes.
It has been suggested that some firms and introducers are arranging for clients to purchase insurance, medical reports or other products or services at inflated prices so that the firm or introducer will receive a higher commission. In some cases the firm may have an interest in the business providing the product or service. The receipt of such commissions, either by you or another person, may put you in breach of section 56(2) of LASPO. Also, where you refer your client to another service provider, the referral must be in the client's best interests and must not compromise your independence and you are required to account to the client for any financial benefit you receive as a result of their instructions. (See the outcomes in Chapters 1 and 6 of the Code.) Even if the client has been sold these products or service before instructing your firm you should be careful to ensure that you are not facilitating arrangements that are detrimental to clients' interests.
You should also consider whether any requirement by an introducer to use a particular provider compromises your independence or your ability to comply with the relevant outcomes (as well as whether your agreement to do so may amount to consideration and therefore a payment which breaches LASPO).
Funding and fee agreements
There have been suggestions that some firms are not discussing with clients the options for funding their claim and in particular that they are not exploring whether the client has insurance that would cover their legal costs, so that the firm can charge an uplift on their fees. It is important that clients are aware of, and understand, the options for funding their claim and any fee agreement they enter into with you. (See, for example, outcomes 1.1, 1.12 and 1.13 and indicative behaviours 1.13, 1.14, 1.15 and 1.17.)
Clients need to be in a position to make informed decisions about any referral to a firm and about how their matter will be dealt with. Some introducers and firms have set up complex arrangements in order to ensure they do not breach LASPO, for example by ensuring it is the client, rather than the third party introducer, who provides information to the firm about a potential claim. If you are involved in such an arrangement, you need to be careful to ensure that the client is not misled about who they are dealing with and who is providing particular services. You will also need to achieve outcomes 9.3 and 9.4 and tell the client about any financial arrangement you have with the introducer.
Whilst we are committed to working constructively with firms and practitioners, we will take enforcement action against those that fail to address the issues and risks associated with referral arrangements, particularly where those arrangements are detrimental to the interests of clients.
If you require further assistance in relation to your referral arrangements contact the Ethics Helpline.