Referral fees: where are we now?
David Knapp from law firm Hart Brown, weighs up whether they are a good business model, or a lifeline for those failing to acquire business by merit
On the 1st April 2013 the Solicitors Regulation Authority brought into force their banning of referral fees in all personal injury cases.
The original announcement made ahead of the 1st April was that “referral fees are to be banned”. The devil is of course in the detail and the great elation of at last having a fair playing field in the residential property market brought on by the banner headline was soon dashed when it became quickly evident that this only related to certain areas of law such as personal injury. Residential conveyancing was excluded from the ban.
Sadly what was good for the goose was not so good for the gander.
Some years before the announcement, at a time when estate agents were beginning to face price competition as the internet took hold of our lives, estate agents needed to find a new source of income. The era of referral fees was born.
In simple terms, certain estate agents have linked up with some solicitors and licensed conveyancers on the promise of referring clients to them if the estate agents are paid a fee per transaction referred. I understand that this can be commonly as much as £300.00 per transaction. The agent, in this example, therefore stands to earn £600.00 from that firm if the person referred has a sale and purchase. As the agents do not have the same restrictions as solicitors in acting for either side of a transaction they can also refer the other parties in that transaction and so if they are involved with more than one property in the chain earn a number of referral fees. A good little earner.
Experience shows that the lawyers who take up this type of arrangement are often out of the immediate geographical area of the property being sold so cutting previously healthy local ties.
My view on this type of arrangement is that lawyers who need to pay referral fees do so due their inability to obtain business on a meritocracy basis.
Other ethical issues also arise such as:-
- Who “owns” the client
- How persuasive are the agents in ensuring that the clients go to the pet solicitor rather than to their normal and chosen solicitor ? One hears anecdotal tales from clients that they are put under huge pressure by the agents.
- Are the clients advised of the existence of a referral fee when pushed to use the paying lawyer/conveyancer?
- Some agents have been known to say that they dislike referring their pet lawyers but have to do so under the terms of their contracts
I would find it interesting to know how many people buying and selling who use firms who pay referral fees go back to them for their next property sale or purchase after the experience.
As an experienced lawyer, I am extremely frustrated at the referral fee ban not extending to all areas of law. I am pretty certain that if a poll was taken of all solicitors as to whether referral fees should be outlawed in conveyancing that there would be an overwhelming majority in favour of a ban.
Quality and regulation is quite rightly becoming more and more of a requirement for solicitors and so surely it is time to ban referral fee arrangements for all conveyancing matters and, sooner rather than later.