Referral Fees

In May 2013 changes were brought in under Part 2 of the Legal Aid, Sentencing and Punishment of Offences Act 2012 (LAPSO) making it a regulatory offence to pay or receive referral fees in personal injury cases.  Aimed at eradicating the compensation culture, this legislation had a huge effect on the personal injury legal sector. Previously, claims management companies had enjoyed extremely good profits sourcing clients and then referring them on for a fee to law firms.

Since the imposition of the ban, the regulators – Solicitor’s Regulation Authority (SRA); Financial Conduct Authority (FCA) and Claims Management Regulator (CMR) have found monitoring the ban on referral fees in personal injury claims extremely difficult.  Many firms have honoured the letter and not the spirit of the law by seeking ways to get round the ban on referral fees.

(a) Alternative Business Structures

Alternative Business Structure (ABS) is the term used to describe a business offering legal advice but headed up by non-lawyers.  Other jurisdictions, most notably the United States, have resisted non-lawyer ownership of firms but the concept has been embraced wholeheartedly across the UK.  Since the introduction of the concept by the Legal Services Act 2007, ABSs have been set up by companies from across the range of commercial sectors from FMCG to Insurance.  When the ban on referral fees was brought in by LAPSO, a number of firms turned to ABSs as a solution.  By setting up joint ventures with non-legal businesses, law firms could continue to benefit from the referrals without committing regulatory offences.  A recent example of just such an arrangement would be the granting of a licence to a major insurance firm to become an alternative business structure as part of a joint venture with a Bristol law firm.

The SRA has declared that where alternative business structures operate it will consider whether the arrangements suggest an intention to carry on as more than one business with referrals being made between them or where there is in fact genuinely alternative business structures.

(b) Joint Marketing Advertising Schemes

Law firms have often joined forces and shared marketing resources, indeed, the government has stated openly that it was not its intention to prevent firms from joining forces and pooling their marketing budgets to seek clients.[1]  If, however, there is evidence that referral fees are paid between firms or alternatively paid to a firm which is set up to seek and refer on personal injury clients then the SRA would consider the arrangements to be in contravention of LAPSO.