The rules about law firm referrals from third parties and how to avoid problems

Access Legal’s regulatory director, Brian Rogers, cross-references common practice with SRA stipulations to highlight potential pitfalls of third-party referrals, and how to keep your firm compliant.

A recent webinar hosted by Access looked at a number of important topics related to the involvement of law firms and solicitors in referral arrangements with external third parties. In this article, we cover the rules under which law firms have to operate, common issues found in referral arrangements and agreements, and how firms can avoid problems going forward.

Where should law firms start when it comes to bolstering their referral arrangements?

The best place to start when looking at what a firm should consider when thinking about taking on new client referrals from third parties, or reviewing existing solicitor referral arrangements, is the Solicitors Regulation Authority’s (SRA) principles that apply in this area.
They are:

1. Act in a way that upholds the constitutional principle of the rule of law, and the proper administration of justice.

2. Act in a way that upholds public trust and confidence in the solicitors’ profession and in legal services.

3. Act with independence.

4. Act with honesty.

5. Act with integrity.

6. Act in the best interests of each client

The importance of independence

Acting with independence encompasses obligations such as duties to avoid conflicts of interest and to not take unfair advantage of a client. Firms must ensure that a referral arrangement with a third party, and its interest in receiving referrals, does not compromise its duty to act with independence and in a client’s best interests.

What the SRA Code of Conduct says about the referral of clients

The next port of call for firms, and their managers, is to look at their obligations under the SRA Codes of Conduct, and in particular section five that deals specifically with the referral of clients. These rules deal with informing clients about the referral details and interests firms may have, fee sharing, evidence requirements, acquiring clients in an appropriate way (no cold calling). Where it appears to the SRA that a firm has made or received a referral fee, the payment will be treated as a referral fee unless it can show that the payment was not made as such – this tends to apply mainly to personal injury cases.

Personal injury referral work

The SRA has a number of concerns over the referral of personal injury work, the payment of fees for which has been banned. These include:

• Allowing third parties to cold call potential clients

• Entering into referral agreements that are in breach of the Legal Aid Sentencing and Punishment of Offenders Act 2012 (LASPO)

• Taking and acting on instructions from third parties without making sure that the instructions originate from the client

• Settling claims without a medical report

• Paying damages or sending cheques to third parties without accounting properly to the client

• Bringing personal injury claims without the client’s authority

• In some extreme cases, bringing claims without the knowledge of the named client claimant

• Not training and supervising staff adequately

Pre-existing contracts

Many firms seem to be unaware of the SRA’s view relating to the position they should take in relation to advising clients on pre-existing contracts they have with referrers. It says: ‘firms have a duty to advise in relation to a pre-existing contract, if on the facts there is something obviously inaccurate or uncertain, or a fee that is apparently wholly unreasonable and disproportionate.”

How far firms have to go in relation to acting in the best interests of clients where they have pre-existing contracts is debatable, but the starting point is likely to be assessing whether something is ‘wholly unreasonable and disproportionate’. For example, a firm would be required to inform a client if they had signed a contract with an estate agent where the fee to be paid was considerably higher than others – a 10% fee while others are charging 2%, for instance.
Firms are unlikely to be happy to have to question commercial arrangements referrers have with clients for fear of damaging their business relationships, but they have an obligation to do so as outlined above.

Employment law referrals

A real-life example of where a lawyer ‘got it wrong’ in not acting in the best interests of the client is where a client was referred in relation to an employment matter – the lawyer not only won the case but also got a letter from the client praising his work. Where he got it wrong was not looking at the fact that the client had paid a fee to the referrer for passing the matter to the employment lawyer. The SRA found the lawyer to be at fault because he should have told the client that they could have instructed him directly for free.

Example referral breaches

One of the important tasks that should carried out when assessing whether a referral arrangement is compliant is checking closely the clauses contained within referral agreements, especially those provided by referrers. Many clauses have been found to breach a number of the SRA Principles but have not been addressed by firms. For example:

• Upfront legal fees being charged and retained by referrers

• Referral fees being charged upfront to clients but ‘dressed-up’ as something else (such as searches or admin fees) – referrers want their referral fees as soon as possible rather than having to wait until the end of a transaction

• Obligations being placed on firms to breach client confidentiality around case progress, complaints, claims and SRA/CQS investigations

• Clauses forcing firms to use referrers’ ‘pet’ search companies that charge higher fees or hidden profits (search fee and admin fee shown as one fee)
How can law firms ensure they get their referral arrangements right?

• Ensure referrers are open, transparent and trustworthy at the start and throughout

• Refuse to enter into any agreement that is questionable and the referrer is unwilling to make appropriate changes

• Regularly review referral arrangements (every six months) – withdraw from arrangements that have become non-compliant

• Ensure clients are made aware of referral arrangements that apply to them
Solicitor referral arrangements in conclusion
The key thing to remember is that the best interests of clients trump any commercial/financial interests a firm has with its referrers