Legal costs and referral fees

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The Law Society recently announced a change of policy with a call for the reintroduction of a ban on referral fees.  The Legal Services Board said it will look at this issue as priority.

The subject of referral fees is not, in theory, one directly related to legal costs but does seem to keep cropping up.  I first became aware of the issue in the context of the sadly missed Claims Direct and Accident Group schemes.  Readers will recall that these schemes, and other similar ones, required payment by the solicitor of an “investigation fee” in respect of each case referred.  These fees were then claimed by claimant solicitors as a disbursement.  I remember the countless arguments I used to have with claimant solicitors (often senior partners) who claimed, despite all the evidence to the contrary, that these were not thinly disguised referral fees.  Such fees were indeed subsequently held to be unlawful (and therefore irrecoverable) referral fees in the Claims Direct Test Cases – Tranche 2 [2003] EWHC 9005 (Costs) and Accident Group Test Cases [2004] EWCA Civ 575.  I was always somewhat surprised that when the referral fee ban was lifted claimant solicitors didn’t start to try to start slipping these fees through again in their claims for costs, but this didn’t seem to happen.

Another link between referral fees and legal costs has recently come to the fore in relation to claims that the former drives up the latter and whether this is the explanation for the 20-35% gap between the amount charged by claimant and defendant lawyers (see article).  This same issue has been highlighted by Lord Justice Jackson in his review of Civil Litigation Costs.

The impact of any return to a ban on referral fees will be entirely dependant on whether it is properly enforced; something which never previously happened.

A fine affair on fees

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The following letter was originally published in the Gazette:

“Dear Editor,

Whether the original ban on referral fees is reinstated (see [2004] Gazette, 4 June, 14) or the amended rules, which offer ‘greater clarity for the profession’, remain in place, the key question will be one of enforcement.

Given the Court of Appeal has confirmed the unlawfulness of the referral fees paid in The Accident Group scheme, what punishment does the Law Society propose for offending firms? If none, then the issue of whether the ban should be lifted is irrelevant as the rules will continue to be flouted.

As the referrals in both The Accident Group and Claims Direct (also held to be unlawful) were via firms of solicitors, it should be easy to obtain details of member firms and the number of referrals made. A simple fixed fee fine per case could be introduced – say, £100.

There are certainly many solicitors who will already have suffered losses from the decisions concerning non-recoverability of the referral fees – but the responsibility for discouraging breaches of the practice rules rests primarily with the Law Society. Does it have the courage to act?

Simon Gibbs”