Third Party Receipts and Payments

Receipts of money from third parties are not fees in the conventional sense. They are however income, and can be used to reduce fees. Payments to third parties, as a reward for introducing clients, for example, are fees paid out by solicitors.

A. Commissions

When a broker arranges an insurance policy, pension, the purchase of shares or simi­lar transaction for a client, he or she is often paid a commission by the third party. Solicitors sometimes act as brokers of such transactions. If they are allowed to keep any commission payable, this seems to create a clear conflict of interests. The relevant interests are the duty of the solicitor to promote the client’s best interests and the solicitor’s interest in successfully selling something to the client. The risk in such a conflict is that, rather than looking for the best arrangement for the client, a solicitor may be tempted to promote that which pays the largest commission.

Under the Solicitors’ Code of Conduct 2007, solicitors were allowed to keep commissions of under £20.¹⁶⁴ This rule was justified by the argument that the admin­istrative work in accounting to the client would exceed the amount paid over. This was somewhat anomalous, and a deviation from the principle that a fiduciary shall

¹⁵⁸ ibid, Indicative Behaviour 1.21.

¹⁵⁹ ibid, Indicative Behaviour 1.16.

¹⁶⁰ ibid, Indicative Behaviour 1.19.

¹⁶¹ ibid, Indicative Behaviour 1.17.

¹⁶² ibid, Indicative Behaviour 1.18.

¹⁶³ Bar Council, Bar Code of Conduct 1981, as amended, at para 307.

¹⁶⁴ SRA, Solicitors’ Code of Conduct 2007, r 2.06.

not take a secret profit. Clients had to be notified of commissions exceeding £20 and could agree that the firm kept it. Consent did not have to be in writing.^[1947]

The rules did not specify that clients should be advised to take independent advice where the commission was a significant amount. The guidance to Rule 3, on conflicts of interest, did, however, stress that a solicitor ‘must insist that the client receives independent advice’ in cases where a solicitor has a personal interest in a client’s transaction.^[1948] This would seem to catch the receipt of commissions. In the previous edition we argued that these rules would only operate in the client’s interests if the client’s bill were reduced accordingly. We also suggested that allowing commissions to be retained was dangerous to the long-term interest of the profession.

In the current SRA Handbook, two principles might be thought to preclude solicitors from receiving commissions. These are Principle 3, not letting independence be com­promised, and Principle 4, acting in the best interests of clients. In fact, commissions would now appear to be caught by an indicative behaviour in the chapter on clients. This provides that solicitors may show that they meet the outcomes by accounting for any financial benefit received as a result of acting for a client, either paying it to the client or offsetting it against their fees. They may keep such a benefit, however, if they can justify keeping it, have told the client the amount, or approximate amount of the benefit, and the client has agreed that they can keep it.^[1949]

Solicitors also have to be aware of Chapter 6, ‘Your client and introductions to third parties’, in the SRA Handbook. One of the outcomes in that chapter is that clients are fully informed of any financial or other interest the solicitor has in referring the client to another person or business.^[1950]

B.

i. Solicitors’ Relationship with Third Party Introducers

Referral fees (or introducer fees) are sums paid, usually by solicitors, to a third party for introducing business. Such payments were prohibited until October 2004, when a limited exception was made to the code banning referral fees.^[1951] The rules on refer­rals exposed the difference in perception between advocates of professionalism and of consumerism. The traditional view was expressed in 1998 by Mr Justice Lightman, who commented that ‘clients are not merchantable commodities to be bought and sold.’^[1952] The new approach was promoted by agencies such as the Office of Fair Trading (OFT). In 2001, an OFT report suggested that the Law Society ban on referral fees was obstructing the development of an online market for introductions, to the disadvantage of solicitors.^[1953]

The third parties usually associated with payment of referral fees are claims management companies. In 2006, claims companies were required to register and meet set conditions of operation.^[1954] Solicitors could not deal with unregistered companies. The exercise revealed that there were over 1,176 such companies, twice as many as previously thought. There were problems with 90 per cent of the applications for registration. The Regulator of Claims Companies was bound to pass to the SRA the names of any solicitors dealing with unregulated claims companies.^[1955]

Claims companies sold their own insurance packages and arranged loans through related companies at high interest rates to cover ATE insurance premiums. They employed their own expert witnesses who often paid a referral fee to the company for the privilege of being a paid court expert witness. They also received referral fees from solicitors on their lists in return for the clients where proceedings had to be commenced. Many of the claims they handled were of small value, and sometimes of doubtful merit, and the costs, in terms of legal fees and insurance expenses, often far outweighed the value of the claim to the client.

The payment of referral fees by solicitors potentially created many problems. Such arrangements set up a conflict of interest for the solicitor between the client and the third party who introduced them to the solicitor. The solicitor might be disinclined, for example, to advise clients that they need not pay introducer’s charges. There is also a potential conflict of interest if solicitors attempt to recoup referral fees from their client.

Referral arrangements also create problems of transparency and trust. Problems emanated from the fact that claimants with small claims could find that the cost of ATE insurance exceeded the estimated value of the damages. Solicitors might fail to explain to their clients how they had come by their cases or the nature of the agree­ments they had made with claims companies. Some might try to recoup referral fees by charging high success fees or contingency fees in simple cases. Others might call such fees ‘administration fees’ and include them in the client’s bill as a disbursement.

Many of the theoretical problems with referral fees lay behind the so-called miners’ costs scandal. In this case, large numbers of firms received cases for presentation to a government compensation scheme for miners, deducting referral fees from miners’ compensation. Some even operated their own referral businesses for the purpose. An investigation resulted in 115 solicitors in 25 firms being referred to the Solicitors Disciplinary Tribunal.^[1956] Three solicitors were struck off and three suspended for periods of between six months and four years.

ii. The TAG Litigation

The deep problems with referral fees were exposed in a number of challenges in exten­sive costs litigation by the insurers of unsuccessful defendants and by the insolvency of two of the largest claims companies.^[1957] A key case is Sharratt v London Central Bus Co (No 2),^[1958] in which a decision by a costs judge, Hurst J, was upheld by the Court of Appeal.

Solicitors receiving the cases paid a TAG subsidiary company, Accident Investigation Ltd, housed in the same building as TAG, a fee of £310 plus VAT, for investigations. The fact that the same payment was made in every case suggested that this payment did not actually relate to work performed. Judge Hirst held that these payments were, in reality, a referral fee and therefore a payment proscribed by the professional conduct rules.

Another problem arising in the TAG and associated litigation related to solici­tors delegating their duties. Under the prevailing regulations, clients had to be given extensive information on the nature of the CFA contract and their potential liabilities and alternative sources of funding investigated. In the TAG cases all this information and investigation was done by TAG and not the solicitor, who simply relied on TAG’s employees doing the job properly.

It was decided in Sharratt (No 1) that solicitors could delegate the duty to inform the client to agents, but only if they were properly appointed and provided an expla­nation to the client as required under the regulations. It was unrealistic to think that this could be done by the unqualified agents of a claims company. From 2007 claims companies were required to abide by certain conditions. Solicitors were forbidden from dealing with unregulated companies, and the SRA frequently reminded them that to do so was a disciplinary matter.

iii. Banning Referral Fees in Personal Injury Cases

In his report on civil litigation costs, Lord Justice Jackson stated that:

It is a regrettably common feature of civil litigation, in particular personal injuries litigation, that solicitors pay referral fees to claims management companies, before-the-event (‘BTE’) insurers and other organisations to ‘buy’ cases. Referral fees add to the costs of litigation, without adding any real value to it.

The Bar and Law Society supported a ban,^[1960] but the Legal Services Board claimed that ‘sufficient evidence of consumer detriment, which would have been needed to merit a ban, has not been found’.^[1961] In September 2011, the government issued a press release announcing that it would adopt Jackson’s recommendation.^[1962]

In April 2013 LASPO 2012, sections 56-60 made it a regulatory offence to pay or receive referral fees in prescribed legal business. Currently, this only covers cases of personal injury or death or in ancillary claims. The ban covers solicitors, claims man­agement companies and insurers. A contract to make or to pay for a referral or an arrangement which is in breach of section 56 of LASPO is unenforceable.^[1963] Breaches of the ban are also subject to action by the regulators of these industries.

iv. Regulation of Solicitors’ Referral Fees

a. Brief History of Regulation

The Solicitors Introduction and Referral Code 1990 stated that ‘[s]olicitors must not reward [introducers of clients] by the payment of commission or otherwise’.^[1964] Solicitors were also warned to be wary of being too reliant on limited sources of referral.^[1965] They were required to conduct six-monthly reviews to ensure that the code had been complied with^[1966] and consider, if they received more than 20 per cent of their income from referrals from a single source, whether that proportion should be reduced.^[1967] Solicitors were also obliged to draw these provisions to the attention of those introducing clients to them.^[1968]

In October 2004, the Introduction and Referral Code was amended by the addition of section 2A, containing seven paragraphs of additional rules.^[1969] These allowed pay­ment of a referral fee provided ‘immediately upon receiving the referral and before accepting instructions to act the solicitor provides the client with all relevant infor­mation concerning the referral and, in particular, the amount of any payment’.^[1970] Additionally, the solicitor had to be satisfied that the introducer had not breached any standards implicit in the practice rules, for example, on solicitors’ advertising.^[1971] The ordinary rules did not apply to ‘normal hospitality, proper disbursements or normal business expenses’.^[1972] This was intended to clear up doubt about the payment to third parties of their ‘genuine expenses’, such as charges for investigations properly made.

Lord Falconer, the Lord Chancellor at the time of the 2004 amendment, was reported to dislike the new rules. When in 2006 the Practice Standards Unit visited 135 firms, only 6 per cent fully complied with them, and in 39 per cent of firms the breaches were major. In June 2007, the SRA reported that one-third of 52 firms inspected had signed referral agreements which ‘required the solicitor to act contrary to the client’s best interests and may also compromise their ability to act independently’.^[1973] The SRA launched a campaign on compliance. It threatened that referral fees would be banned if the rules were not obeyed.^[1974]

The Solicitors’ Code of Conduct 2007 built on the foundations of past experience. The rules allowed solicitors to seek clients through potential professional connec­tions such as commercial organisations or public bodies, including other solicitors or estate agents or insurance agents, provided certain conditions were satisfied.^[1975] These required a written agreement with the introducer, subject to SRA inspection, that it could not ‘influence or constrain’ the solicitor’s advice to the client. Clients were to receive written details of the referral fee and the business arrangements between the solicitor and the introducer. The introducer and solicitor had to agree to abide by the rule, including publicity restrictions.

Advice about not depending on referrals was diluted in the 2007 Code. Solicitors were warned not to ‘become so reliant on an introducer as a source of work that this affects the advice you give to your client’.^[1976] In monitoring volumes of work from particular sources, firms were to consider ‘the amount and proportion of your firm’s income’ arising from a particular referrer.^[1977]

b. Current Regulation

In the SRA Handbook, fee sharing and referrals are covered in Chapter 9. The seven outcomes and 12 indicative behaviours are overlapping and slightly repetitious. The main outcomes are that solicitors must ensure that their independence and professional judgement are not prejudiced by virtue of any arrangement with another person^[1978] and that clients’ interests are protected notwithstanding those arrangements.^[1979] Solicitors must ensure that financial arrangements with introducers are in writing.^[1980] They must be sure not to pay for referrals of persons the subject of criminal proceedings or receiv­ing public funding.^[1981]

Clients must be informed of any fee sharing arrangement relevant to their matter.^[1982] They must be informed of any financial or other interest which an introducer has in

referring the client to the solicitor.^[1983] The final outcome is that clients must be able to make informed decisions about how to pursue their matter.^[1984] In Chapter 1, also, one of the key indicative behaviours in relation to fees is ‘explaining any arrange­ments, such as fee sharing or referral arrangements, which are relevant to the client’s instructions’.^[1985]

The other indicative behaviours in Chapter 9 are consistent with the outcomes. For example, solicitors should be satisfied that referrals have not been acquired as a result of activities which are forbidden to SRA-regulated persons or contrary to the princi­ples or Code.^[1986] Similar restrictions apply to making referrals to others. For example, in the SRA Handbook, Chapter 6 ‘Your client and introductions to third parties’ one of the four outcomes is ‘not being paid a prohibited referral fee’.^[1987]

p. Barristers and Referral Fees

Under the old Bar Code barristers were not allowed to ‘make any payment... to any person for the purpose of procuring professional instructions’.^[1988] Where self­employed barristers shared premises with other persons they were not allowed to have a ‘general referral arrangement or understanding’.^[1989] They were required to keep available for inspection a record of any work or clients referred by any such persons, or referred to any such persons, and of the reasons for any referral.^[1990]

The current Bar Code of Conduct contains an outcome prohibiting the payment of any referral fees.^[1991] The notes for guidance on referral fees explain that making such payments is inconsistent with the core duties protecting clients’ best interests, barristers’ independence and trust and public trust and confidence in the profes­sion. The guidance reminds barristers that the Legal Aid Agency’s Unified Contract Standard Terms prohibit contract-holders from making or receiving any payment or other benefit for the referral or introduction of client, whether or not they know of or consent to, the payment.^[1992] It goes on the state that, in private or publicly funded cases, payment of referral fees to which clients have not consented can be criminal offences under the Bribery Act 2010.

IX.