Wednesday, January 30, 2019

Property referrals could be banned in a year!

The government recently said that it is looking to ban property referrals in 12 months if transparency over them cannot be achieved.

From what I have seen many referral arrangements will need significant change to bring them up to what the government will want to see. 

I have carried out a considerable amount of work looking at various referral agreements that law firms have entered into and have found many non-compliant and misleading, for example:

  • The referral is paid by the client before being referred to the law firm, with such fees being dressed up as something else (search fees, upfront legal costs, “Guarantee” fees, etc.).
  • Law firms being required to use the referrers’ preferred search companies and other service providers.
  • Referrers dictating that they have access to client information.
  • Referrers dictating that law firms must not approach clients for service feedback as they want to do it.
  • Referrers putting undue pressure on law firms to carry out their instructions.

I will now go through each of the above and outline where I believe you would be at risk of regulatory action should you sign up to such agreements:

  • You have a duty to act in the best interests of your clients and this includes looking at any arrangement they were involved in prior to coming to you, for example, if a client has to pay money to be referred to you they should be told by you that they can in fact come direct to you for free. This would not go down well with the referrer but your primary duty is to your client not a third party.
  • You have a duty to protect client money and assets, so money paid by a client should be protected using your client account, for example, money paid by the client for searches, upfront legal fees, etc., should be paid to you and not the referrer. Clients’ money would not be protected if for example the referrer went bust or decided to run off with the clients’ money.
  • You have a duty to provide your clients with all relevant information that allows them to make informed decisions about their matters and this includes making it clear what they are expected to pay and why.
  • You have a duty to ensure you retain your independence, this would not be fulfilled if you allowed referrers to dictate terms to you which were not in the best interests of your clients. Many agreements I have seen include clauses that talk about ensuring the best interests of clients are served, however, when you look at the commerciality of the arrangement it is clear that the referrer is in the driving seat!
  • You have a duty to ensure you protect the confidentiality of clients’ information and should not let others see it unless you have the clients’ consent; the SRA’s view is that a blanket authority in your terms and conditions allowing referrers access is unacceptable and that consent should be sought when a request is made and before information is released.
  • Firms that are CQS accredited have an obligation to seek feedback from their clients and where received pass this to CQS at the appropriate time, so signing up to a referral agreement barring you from doing this will bring you into breach of the CQS Scheme Rules. With the imminent update of the CQS scheme, which will include enhanced desk-based and visit-based assessments, you need to ensure you are fully compliant with the Scheme Rules otherwise you risk losing CQS and the panel positions that require this as a condition of membership.

It is apparent that seeking money from clients, in whatever guise, is intended to give referrers a cashflow advantage as they don’t have to wait for their referral fee at the end of a matter, or require law firms to pay it on referral out of their own money until they get paid; they also don’t have to chase slow paying law firms so debt-collection costs are reduced!

There will always be competing priorities between what you should do for your clients and keeping referrers of work happy, but from a regulator’s perspective your number one priority should always be your clients!