Recommendations and Referrals
We have looked at referrals and recommendations (or introductions) before – back in 2016 when matters were regulated by the previous 2011 Handbook. With the introduction of the Standards and Regulations in November 2019, things have changed again. Not hugely, that is true, but sufficient to warrant us looking again at the topic.
The history of referrals and recommendations, in particular the payment of referral fees, is a long and chequered one that for many years divided opinion.
Traditionalists believed that the payment or receipt of referral fees would jeopardise a client’s’ ability to obtain independent advice, cause reputational damage to the profession and should thus be prohibited. The view was that solicitors should be in the driving seat and that accepting, or being expected to make, any form of an inducement, financial or otherwise, would weaken the solicitors’ position.
The realists, however, were well aware that solicitors were not in the strong position many would have liked to believe they were and that the truth of the matter was that referral fees were a fact of everyday life – whether banned or not. They knew that firms that ignored referral fees, or who were not prepared to make recommendations (with or without their being a quid pro quo present), could not compete effectively with those who ignored the rules and did. Many argued that the ban went further than was necessary for the purposes of ensuring independent advice and was in fact harming the profession’s ability to compete in a marketplace that was becoming ever more commercial.
In the face of increasing competition from licensed conveyancers and others, the position as to referrals of business rules was gradually relaxed and by 1988 solicitors were permitted to enter into referral arrangements provided the introducer was not “rewarded”. Even this safeguard was swept away on the grounds that:
- no obvious link between payments for referrals and a solicitors’ independence could be conclusively proved;
- it prevented solicitors competing effectively with other legal services providers;
- it was almost impossible to enforce;
- many solicitors did it anyway – adopting a more “relaxed” interpretation of the word “reward” than their colleagues; and
- there was no real perception of public protection involved.
Debate continued and payments for referrals continued to be prohibited until 2004 when payments, subject to conditions and safeguards such as full disclosure to the client, were officially sanctioned. Since then, the position has continued to be liberalised – first in Rule 9 of the Solicitors Code of Conduct 2007 and then in the SRA Code of Conduct 2011.
However, we have subsequently seen further restrictions imposed in relation to the payment of referral fees in the area of personal injury claims by the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”). It has been left open for these restrictions to be applied to other types of referrals in the future – although so far no such steps have been taken.
2. The Land of Confusion
Before we look at referrals and recommendations in any more detail, it would be a good idea to clarify what we mean by these terms and to explain how they differ. Confusion often arises from a failure to distinguish these two similar, but nevertheless quite separate, processes. The new Standards and Regulations have done little to dispel that confusion.
Under the SRA Code of Conduct 2011 things were a little clearer. The recommendation of matters or clients to others was dealt with in First Section of the SRA Code of Conduct “You and your client” in Chapter 6 “Your client and introductions to third parties”. This clearly started off with the words “there may be circumstances in which you wish to refer your clients to third parties, perhaps to another lawyer or a financial services provider” making absolutely sure that you were aware of the circumstances to which it applied.
The process of receiving work from external referrers, on the other hand, was dealt with in an entirely separate section Second Section “You and Your Business” in chapter 9 “Fee Sharing and Referrals” which also clearly set out what it was about with the words “this chapter is about protecting clients’ interests where you have arrangements with third parties who introduce business to you and/or with whom you share your fees”.
Unfortunately, under the new SRA Standards and Regulations, things are not quite so clear cut and the distinction has been blurred by both topics being dealt with in the same provision – paragraph 5 (“Business Requirements – Referrals, Introductions and Separate Businesses”) of the SRA Code of Conduct of Conduct for Solicitors, RELs and RFLs (‘the Code for Individuals’). The same provisions are imported into the SRA Code of Conduct for Firms (‘the Code for Firms’) verbatim by para 7.1(b) of that Code.
However similar the two provisions may at first sight appear to be, this is inevitably going to lead to confusion – especially amongst those new to the profession who might not be aware of how such matters were dealt with previously. This is a shame since clearly different considerations apply in relation to introducing a client to another source of advice and thereby receiving any benefits by way of recommendation (or introduction) when compared with making a payment or giving some other benefit to a third party in order to secure instructions by way of a referral.
Indeed, the confusion seems even to reach as far as the Law Society who in section 6.4 of Lexcel state that “Practices must … advise the client where the practice will receive a financial benefit as a result of accepting instructions.” Whilst a firm might pay a third party for a referral of work to it, it is unlikely that the firm would be paid for taking work on unless perhaps the client’s fees were being paid by a third party – although that is unlikely to be what this provision has in mind.
We will start by looking at recommendations, or what used to be termed introductions.
To be clear, a recommendation for our purposes is to be taken as meaning an introduction of a client by a solicitor to a third party rather than a referral which is the introduction to the solicitor by a third party of a client. In either case it can be with or without the payment of a fee or some other form of consideration.
So far as the Code for Individuals is concerned, the same provisions apply to both a recommendation as to a referral, namely those to be found in paragraphs 5.1 to 5.3:
5.1 In respect of any referral of a client by you to another person, or of any third party who introduces business to you or with whom you share your fees, you ensure that:
(a) clients are informed of any financial or other interest which you or your business or employer has in referring the client to another person or which an introducer has in referring the client to you;
(b) clients are informed of any fee sharing arrangement that is relevant to their matter;
(c) the fee sharing agreement is in writing;
(d) you do not receive payments relating to a referral or make payments to an introducer in respect of clients who are the subject of criminal proceedings; and
(e) any client referred by an introducer has not been acquired in a way which would breach the SRA’s regulatory arrangements if the person acquiring the client were regulated by the SRA.
5.2 Where it appears to the SRA that you have made or received a referral fee, the payment will be treated as a referral fee unless you show that the payment was not made as such.
5.3 You only:
(a) refer, recommend or introduce a client to a separate business; or
(b) divide, or allow to be divided, a client’s matter between you and a separate business;
(c) where the client has given informed consent to your doing so.
Whilst these are fairly clear requirements to consider, and we will look at them in more detail shortly, nevertheless issues other than these also arise from an application of the SRA Principles. Specifically, that you act “in a way that upholds public trust and confidence in the solicitors’ profession and in legal services provided by authorised persons” (Principle 2), “with independence” (Principle 3), “with honesty” (Principle 4), “with integrity” (Principle 5) and “in the best interests of each client” (Principle 7).
Although we are told by the SRA that we should not do so, this is probably one of those areas where, to the extent that there are no changed provisions it is helpful to refer back to the earlier Code of Conduct 2011.
Outcome O (6.1) stated that whenever you made a recommendation to an outside agency or adviser, it had to be in the best interests of the client and not such as would compromise your independence. Thus, for example, recommending a client to a local estate agent should be based on an honest assessment of that estate agents ability to best represent the interests of that client rather than because the estate agent was likely to refer matters back to the firm. This therefore addresses, therefore, the Principles more than paragraph 5 considerations.
Moving on to the earlier Outcomes O (6.2) and O (6.3), we are now moving more into the territory of paragraph 5.1 of the Code for Individuals which requires that clients must be informed of “any financial or other interest” which you have in making any recommendation (similar to paragraph 5.1(a)) in their matter and this duty is now extended to “your business or employer”. Thus, paragraph 5.1(a) states “clients are informed of any financial or other interest which you or your business or employer has in referring the client to another person or which an introducer has in referring the client to you”.
The words “or other interest” should be noted carefully as they are often overlooked. In the above example, if the firm were not in receipt of a direct referral fee by the estate agents but there were personal interests such as the spouse/partner of one of the principals being a partner, director or perhaps even simply an employee of that concern, this should be declared to the client. Another example could be where your firm does not have, for example, a family law department and so recommends divorce work to another firm that reciprocates by recommending your firm to its clients for any conveyancing work. This could be sufficient to count as an “other interest” which should therefore again be disclosed to the client.
The burden on you to disclose an interest will be even greater where the recommendation is being made on commercial or paid-for basis. Here the requirements at paragraph 5 of the Code for Individuals appear to go further than in the previous Code of Conduct 2011 in requiring that a written agreement should be in place, and the client duly informed, in relation to any fee sharing (or presumably payment) situation. Ideally that agreement would deal with not only the actual payment made but would need to place some form of duty upon the other person, if not a solicitor, to observe the provisions of paragraph 5.1(d) and (e) – namely not to receive or make payments in relation to “clients who are the subject of criminal proceedings” and to ensure that any client referred to you by an introducer “has not been acquired in a way which would breach the SRA’s regulatory arrangements if the person acquiring the client were regulated by the SRA” (more relevant to referrals of which more shortly). Indeed, firms should in particular note the provision that introductions made on a paid-for basis are not permitted in the realms of criminal work (covered previously under Outcome O (6.4).
Finally, in relation to recommendations we need to look at something which is no longer there, namely the specific provision previously to be found in Outcome O (6.3), for which there is no direct replacement. This required that clients be in a position “to make informed decisions about how to pursue their matter”. Arguably it could perhaps be said that paragraph 1.4 of the Code for Individuals covers this with the words “You do not mislead or attempt to mislead your clients, the court or others, either by your own acts or omissions or allowing or being complicit in the acts or omissions of others (including your client)”. Added to this could be paragraph 8.6 “You give clients information in a way they can understand. You ensure they are in a position to make informed decisions about the services they need, how their matter will be handled and the options available to them”.
Whatever the position as to those two paragraphs, you would be well advised to bear in mind O (6.3) in your dealings with recommendations. The original version of Outcome O (6.3), which remained in force until Version 6 of the SRA Code took effect on 1 January 2013, provided for the situation where a client required advice on investments, such as life insurance with an investment element or pension policies and where the solicitor was under a duty only to refer the client to an independent intermediary. This original Outcome O (6.3) was removed entirely from the 2011 Code for version 6 onwards and was replaced with the amended requirement that clients must be in a position to make “informed decisions about how to pursue their matter”.
It was not entirely clear what this meant but it was assumed that the provision placed upon the solicitor an obligation to carry out their own investigation into the suitability of any adviser – particularly a financial adviser – to whom the client was referred. From the firm’s point of view this could be a dangerous position as it could leave the firm open to claims from clients to whom inappropriate referrals have been made. Thus, to comply, firms had to consider implementing a procedure whereby those within the firm making referrals did so only to pre-approved independent financial advisers and that the criteria by which they were selected was recorded.
Although Outcome O (6.3) has gone, its spirit lives on in Principle 7, namely that a solicitor acts “in the best interests of each client”. If you recommend a client to a third party, then you must be sure that the third party is able to act in the client’s best interests.
The other side of the coin, so to speak, from a recommendation by you to a third party is the referral to you by a third party.
The preamble to Chapter 9 in the 2011 Code of Conduct summed this up as follows:
This … is about protecting clients’ interests where you have arrangements with third parties who introduce business to you and/or with whom you share your fees. The relationship between clients and firms should be built on trust, and any such arrangement should not jeopardise that trust by, for example, compromising your independence or professional judgement.
This is, as we said earlier, dealt with now by the same provision in relation to recommendations, namely paragraphs 5.1 – 5.3.
As with recommendations, you might find it useful to consider the provisions from the earlier 2011 Code of Conduct which were to be found in Outcomes O (9.1) to O (9.8). These provided:
O (9.1) your independence and your professional judgement are not prejudiced by virtue of any arrangement with another person;
O (9.2) your clients’ interests are protected regardless of the interests of an introducer or fee sharer or your interest in receiving referrals;
O (9.3) clients are in a position to make informed decisions about how to pursue their matter;
O (9.4) clients are informed of any financial or other interest which an introducer has in referring the client to you;
O (9.5) clients are informed of any fee sharing arrangement that is relevant to their matter;
O (9.6) you do not make payments to an introducer in respect of clients who are the subject of criminal proceedings or who have the benefit of public funding;
O (9.7) where you enter into a financial arrangement with an introducer you ensure that the agreement is in writing;
O (9.8) you do not pay a prohibited referral fee.
They are all still relevant with:
- Principle 3 covering O (9.1);
- Principle 7 covering O (9.2);
- paragraphs 1.4 and 8.6 (possibly – see above) covering O (9.3);
- paragraph 5.1(a) covering O (9.4);
- paragraph 5.1(b) covering O (9.5);
- paragraph 5.1(d) covering O (9.6) – although note that the provision relating to legal aid referred to in O (9.6). The same more general restriction should be understood still to apply, however, since the Legal Aid Agency’s contract terms prohibit the payment of introduction fees for legally aided work in general. The SRA have indicated that generally they do not now include in the Codes of Conduct matters which are adequately dealt with elsewhere; and
- Paragraph 5.1(c) covering O (9.7).
That just leaves us with O (9.8). This is clearly a reference to provisions such as those to be found in LASPO.
Although not referred to in the body of either of the Codes, LASPO is nevertheless referred to in the Introduction to the Code for Individuals. This states:
In addition to the regulatory requirements set by us in our Codes, Principles and our rules and regulations, we directly monitor and enforce the requirements relating to referral fees set out in section 56 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 ….
The SRA has issued a comprehensive Guidance Note entitled “The prohibition of referral fees in the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) Sections 56-60” covering the situation. Given that all such Guidance Notes contain the SRA’s warning that “This guidance is to help you understand your obligations and how to comply with them. We may have regard to it when exercising our regulatory functions”, it would be foolish not to regard them as effectively part of the regulatory cannon.
The specific provisions of LASPO are adequately dealt with in this Guidance Note and so will not be dealt with here.
So far as referral fees generally are concerned, there are a few issues which should specifically be borne in mind.
Paragraph 5.1(c) makes it clear that where referral fees are paid there must be an agreement in place with the firm which will need to set out the terms of the referral including any payments or other benefits that are made. The SRA are also going to want to see evidence of training and monitoring of staff who deal with referrals so as to ensure that they know what they must and must not do.
Given that you also have a responsibility (under paragraph 5.1(e)) to ensure that any referral agency that sends referrals to you does not acquire those contacts “in a way which would breach the SRA’s regulatory arrangements if the person acquiring the client were regulated by the SRA” – for example not to cold-calling members of the public – then it would also be sensible to ensure that such a provision appears in the written agreement. Monitoring of this from time to time by the solicitor receiving the referral would probably also be a good idea.
Also, it has long been the case that the SRA will judge whether a referral fee is being paid by its substance rather than its label. Thus, if it is felt that the term “marketing expense” or the like is simply to disguise what is actually a referral fee, then it will be judged as such. This provision now appears at paragraph 5.2 of the Code for Individuals, largely replicating Indicative Behaviour (9.8) of the 2011 Code of Conduct. This, therefore, places the burden fairly and squarely upon the solicitor to show that a payment is NOT a referral fee rather than upon the client or the SRA to show that it is.
Although the other indicative behaviours from this chapter will not be found in paragraph 5, it would be as well to bear them in mind going forward as being at the very least examples of good and bad practice in this area.
IB (9.1) – “only entering into arrangements with reputable third parties and monitoring the outcome of those arrangements to ensure that clients are treated fairly” continues to make good sense in relation to any arrangement where there is the potential for a client to be treated unfairly. Aside from reputational and other business-related risks, there is a duty in Principle 7 to ensure that you act in the best interests of each client;
IB (9.2) – “in any case where a client has entered into, or is proposing to enter into, an arrangement with an introducer in connection with their matter, which is not in their best interests, advising the client that this is the case”. Again, from a business perspective this makes sense and Principle 7 continues to be relevant;
IB (9.3) – “terminating any arrangement with an introducer or fee sharer which is causing you to breach the Principles or any requirements of the Code”. Clearly you must not breach any of the Standards and Regulations and paragraph 5.1(e) of the Code for Individuals requires that you check that “any client referred by an introducer has not been acquired in a way which would breach the SRA’s regulatory arrangements if the person acquiring the client were regulated by the SRA”.
IB (9.4) – “being satisfied that any client referred by an introducer has not been acquired as a result of marketing or other activities which, if done by a person regulated by the SRA, would be contrary to the Principles or any requirements of the Code”. See above;
IB (9.5) – “drawing the client’s attention to any payments you make, or other consideration you provide, in connection with any referral” See paragraph 5(1)(a) and (b) of the Code for Individuals;
IB (9.6) – “where information needs to be given to a client, ensuring the information is clear and in writing or in a form appropriate to the client’s needs”. See paragraph 3.4 of the Code for Individuals “You consider and take account of your client’s attributes, needs and circumstances”.
IB (9.7) – “having effective systems in place for assessing whether any arrangement complies with statutory and regulatory requirements”. See above;
IB (9.8) – “ensuring that any payments you make for services, such as marketing, do not amount to the payment of prohibited referral fees”. See above; and
IB (9.9) – “retaining records and management information to enable you to demonstrate that any payments you make are not prohibited referral fees”. Paragraph 2.2 of the Code for Firms provides that you must “keep and maintain records to demonstrate compliance with your obligations under the SRA’s regulatory arrangements”.
5. Separate Businesses
Finally, it is worth mentioning briefly the position as to separate businesses since they are covered specifically in paragraph 5.3 of the Code for Individuals. Although dealt with under the composite heading of “Referrals, introductions and separate businesses”, this is in fact a provision that has been carried over from Outcome O (12.4) in the 2011 Code of Conduct and is in fact the only separate business provision carried over.
In a nutshell, it is a requirement that a client gives “informed consent” wherever there is a recommendation or referral relating to a separate business of the solicitor. The definition given for a separate business being which “you own; which you are owned by; where you actively participate in the provision of its services, including where you have any direct control over the business or any indirect control over the business through another person, or which you are connected with, and which is not an authorised body, an authorised non-SRA firm, or an overseas practice”.