What may happen if referral fees were banned in the conveyancing market? Would it make it any easier for the High Street firms to compete? Would it remove the perceived incentive to be swayed giving advice in favour of the introducers interests above that of the client? We don’t think so but we intend to explore why.
After expressing delight at the decision to ban referral fees Des Hudson Chief Executive of the Law Society said “The Society is however disappointed that the ban will not be extended more widely – for example into the area of conveyancing. The Society believes this approach is short-sighted and does not recognise the clear potential for consumer detriment that exists in respect of one of the most important transactions most people make in their lives.
“Consider this, I appoint an estate agent to sell my house, I pay his fee, without my knowledge he sells my case to a conveyancer. How is that in the interests of the consumer? The Society has written to the Department of Business, Innovation and Skills asking them to reconsider and will be pressing the Government to include a general prohibition on referral fees throughout the legal sector. Referral fees are not in the public interest."
It seems referral fees have been a contentious issue within the world of conveyancing for as long as we can remember. Both sides seem to approach this with almost the religious fundamentalism that the Monty Python team derided in The Life of Brian. There are few agnostics, you are either against referral fees or you think they have a place in the market subject to reasonable controls.
Advocates argue that referral fees are merely the cost of client acquisition, that is, they represent the cost that the retailer charges when they sell a product or service created by someone else. Historically this would have been a round of golf or a box of chocolates but the market has now matured and is above board with rule 9 of the Solicitors’ Code of Conduct requiring full client disclosure. Some referral fees in the conveyancing market can be upwards of £200 per case.
Detractors argue that the sale of legal services by third parties for reward fundamentally damages the ability of the supplier to act in their client’s best interest because they will always act in a way to protect the introducer. Detractors would say that referral fees are pernicious. Jonathan Smithers, the Chair of the Conveyancing and Land Law Committee, clearly sits in this camp believing that if you receive lots of case referrals from a single agent as a conveyancer you are just unable to say no to that client.
As someone that has experience within a large panel manager I would hope this was never the case with firms that I referred work to but as the introducer you do rely on the firm to speak up when they need to in accordance with acting in their clients best interest. If firms swayed to introducers perceived best interests the introducers brand would be damaged and professional negligence claims would flow. Insurers certainly don’t seem to have an issue with conveyancing claims caused by conveyancers acting in introducer rather than client interests. In fact they favour large conveyancers compared to smaller ones due to statistically better claims records.
Whilst referral fees operate in a different way in the personal injury market to the conveyancing market opinion will clearly be divided as to whether the proposed ban on referral fees in the personal injury sector should be extended to the conveyancing sector.
The Law Society clearly thinks that primary legislation should be created to ban referral fees across all areas of legal work to avoid the conflict of interest.
Corporate Estate Agents, Lenders, Brokers, Web comparison sites and panel managers have all benefitted from the payment of referral fees historically, but what is really interesting was that the banning of referral fees didn’t actually stop them and the rules were widely abused under the old Code of Conduct for Solicitors. Now, for the first time, introducers in the personal injury market face the potential that the Government will ban similar fees in that sector. So what might be the outcome in the conveyancing market if referral fees were banned?
Many would hope that a ban on referral fees would result in clients not being sold conveyancing at every possible stage in the home buying process and therefore High Street firms would find it easier to compete and access their market.
In some ways you would think that if an agent adds £200 on to the amount that the public pays for conveyancing it would make it easy for conveyancers who don’t pay referral fees to compete on price. But often the firms that call for a ban on referral fees forget that it will result in falling prices and this will make it harder for them to compete.
Even if there were a ban we still believe that corporate estate agents, lenders and brokers would still want to try to avoid their clients going to conveyancers that they did not trust. They would continue to promote certain conveyancers irrespective of payment because of a perception by them that the majority of conveyancers are inefficient and have poor offer to exchange times.
A second factor is also likely to happen in the market. Where introducers are unable to earn referral fees directly why wouldn’t they come into the market and build their own conveyancing firms?
There are no referral fee between Countrywide and Countrywide Property Lawyers they are all in the same group and it is largely irrelevant where the income from the sale of conveyancing sits. So why wouldn’t they extend this model and have others follow them?
At the moment the top 100 conveyancers produce 24% of the conveyancing in the market with the bottom 1000 firms 2%. Removal of referral fees is likely to concentrate this further as those that presently sell and distribute conveyancing become Licensed Conveyancers. After all the CLC rules are so much more attractive than the SRA rules, especially if you only do conveyancing. So why would a legal firm that only does conveyancing want to be a solicitors practice?
Maybe a referral fee ban could bring about perverse results that only accelerates the demise of the smaller firms within the market and concentrates the power of introducers of work.
Referral fees can cause harm where they are not disclosed or where there is pressure to act in ways incompatible with the client’s interests but that should mean effective regulation rather than a ban.
If you disagree we would very much like you to post your opinion below.