LSB Report – Referral Fees Save Money for Consumers – 17th May 2010

The Legal Services Board has produced its long awaited report into the impact of referral fees on the market for legal services with what some may see as surprising conclusions.

In a detailed report it concludes that there is no evidence that referral fees increase the price of conveyancing for consumers and do not reduce the quality of the work. Given the lack of consumer detriment that the report finds in referral fees many firms that have been penalised for minor breaches may wonder why they have been challenged in this way.

Charles River Associates who were appointed to conduct the cost benefit analysis have found that:-

– Conveyancing referrals are commonplace second only to personal injury referrals..

– Consumers are most likely to shop around for conveyancing services compared with other legal services.

– Prior to the allowance of referral fees in 2004 many "creative" schemes were used to enable fees to be paid for work.

– A consumers choice of conveyancer is often "determined by estate agents" on the basis of referral fees and this has promoted the use of conveyancing panels.

– Smaller conveyancers who do not pay referral fees often have other arrangement for reciprocation in place.

– Referral fees do not impact on the size of the conveyancing market (compared to challenges relating to personal injury)

– Referral fees have risen since 2004 from £50-£100 per case to commonly £200-£400 per case

– Despite referral fees rising consumers who go to conveyancers that pay referral fees pay less than those that use non referral paying conveyancers suggesting that large direct firms are more efficient.  Those consumers using a referral fee paying conveyancer pay on average £543 for their conveyancing whilst non referral fee paying firms pay £687 on average.

– There is no evidence that referral fees reduce the quality of work

In the detail of the report many interesting points were made.

The report found that most estate agents believed that they had substantial influence over the consumers choice of conveyancer with over 50% of estate agents reporting that 31% of their clients went with the conveyancer that they recommended.  81% of estate agents held a list of recommended conveyancers to whom they refer clients.  42% of estate agents stated that since 2004 and the introduction of referral fees more conveyancing in their local area was now being conducted by national rather than local firms.

The report also details at some length the arguments many propose for the quality of conveyancing being reduced due to referral fees (e.g. national large firms not having local knowledge), but stated that no evidence was given to support these arguments and in the case of local knowledge the same firms were happy to act on their own clients instructions in distant localities.

57% of estate agents felt that referral paying conveyancers were faster to completion than those that did not.

18% of estate agents do not disclose the fees but those agents may not have to if they refer to licensed conveyancers. The SRA Practice Standards Unit found that 55% of solicitors did not fully comply with the referral rules and had minor weaknesses in their procedures with 39% having significant weaknesses in their procedures.

In the last 10 years there had only been 12 complaints to the Legal Complaints Service about referral fees and that 92% of agents had never received a referral fee complaint.

Evidence from lenders indicated that the larger firms had no greater propensity to commit fraud than smaller firms and in fact that sole practitioners were more likely to commit fraud due to a lack of control procedures being in place.  

In respect of conveyancing the report concludes that

– A ban would result in "creative schemes" to avoid payment that would be difficult to enforce.

– Capping referral fees would produce the same response i.e creative avoidance schemes that were hard to enforce.

– Disclosure to consumers of referral fees is important but there is no evidence that disclosure actually changes consumers behaviour at all.

– Providing referral fee data to an Approved Regulator would not help measure any consumer detriment.

Charles River Associates reached this conclusion by assessing existing research including the OFT Market Study on Home Buying and Selling (Feb 2010), conducting initial interviews and then more detailed interviews with one estate agent, 2 mortgage providers, 7 solicitors or licensed conveyancers and 2 trade associations, a quantitive survey of 179 estate agents, and by conducting a policy assessment.