Firms must inform clients of referral fees, says LSB

Firms should be forced to disclose to clients when referral fees have been paid for cases, the Legal Services Board (LSB) has concluded.

The LSB launched a detailed review of the lucrative referral fee market in response to calls for their outright ban. It has concluded that there is insufficient evidence to suggest the fees are detrimental to consumers and rather than an outright ban has concluded that transparency measures should be put in place.

“We’re persuaded that the interests of consumers are best served by continuing to permit referral fees, but managing their impact through shining the light of transparency on them,” said LSB chairman David Edmonds.

A report published by the LSB in September, Referral fees, referral arrangements and fee sharing, found that introducers can be paid between £200 and £800 for referrals depending on the level of services provided.

Under the new framework introducers will be forced to disclose the level of referral fee and who it is being paid by.

In the personal injury market, which these changes will impact most, claims management companies act are perceived as primary introducers.

Between 2005 and 2008 claims management companies spent between £35m and £40m on marketing their services to consumer clients.

Legal regulators will be expected to “reduce the likelihood of detriment” to the consumer, the LSB said.

The new rules, however, will not extend to the insurance market, which comes under a non-legal framework. Evidence presented to the LSB, it said, showed that income streams derived from the referral fee payments held keep insurance premiums down.

Nevertheless, the liability costs of referral fee across all legal work exceeded the income from referral fees in LEI.

The transparency regime will also not be applicable to alternative business structures (ABS’) following the implementation of the Legal Services Act, an LSB spokesman said.