What are referral fees?
You will read and hear about referral fees in the media.
A referral fee can be paid by a solicitor in return for being put in contact with a client. Referrals are made by estate agents, banks, building societies, insurance companies, insurance brokers, and a whole host of other agencies. They are being paid a fee for introducing legal work to a solicitor. It is quite usual in the conveyancing and personal injury fields of law.
These referral fees are perfectly legitimate but in certain instances the payment of a referral fee and the amount must be made known to the client. Referral fees between solicitors do not have to be made known to a client, but if a referral fee is paid to a non-solicitor introducer then the payment should be made known, and in writing.
In the personal injury area many companies have sprung up to attract personal injury clients. They advertise on the television and internet promising no win no fee. They make their money by attracting cases and selling those business leads to solicitors. The solicitors pay a referral fee. You might say the solicitors are letting someone else do their marketing, and paying for that marketing when a client is introduced.
Certain introducers of legal work are regulated by the Claims Management Regulations. These businesses market for clients mainly in these fields:
• Personal injury.
• Criminal injuries compensation.
• Employment matters.
• Housing disrepair.
• Financial products and services.
• Industrial injury disablement benefits.
The policy background taken from an explanatory note to the regulation of this business tells us claims management businesses gather cases either by advertising or direct approach. They then act either directly for the client in pursuing the claim, or as an intermediary between the claimant and a legal professional or insurer. Claims management businesses make money from several sources—from referral fees from solicitors; from commission on auxiliary services; from the sale of after-the-event insurance; and sometimes from loans to their clients. Concerns have grown over the unprofessional conduct by those who are providing the service for commercial gain—particularly as the activities of claims management businesses have extended into many areas of litigation, well beyond personal injury, and even into claims for certain kinds of benefits even though no litigation is involved.
Such businesses must be authorised (which means registered), and must tell the potential client they will receive a fee if a solicitor accepts their case. You should also be told the amount, and be told at the outset.
Many institutions are exempt from these regulations, and the most significant are the insurance companies. They are perfectly entitled to charge a referral fee, and many do, but they do not have to tell you.
How much is paid as a referral fee?
A quote from a report by Oxera Consulting Ltd Marketing costs for personally injury claims (Association of British Insurers Research Paper 15, 2009):-
“The final dynamic in the market is competition between solicitors for a relatively stable supply of PI work from referral companies. Referral fees have indeed increased over time. Evidence suggests that the payment of explicit referral fees began in 1999, at a level of approximately £50 per referral. For some BTE referral companies, this explicit referral fee was paid in addition to the solicitor accepting a number of unprofitable, non-injury, cases for every PI case referred. As the business model of such referral companies altered, and the non-injury cases were handled in-house, referral fees for the PI cases rose quickly to around £250. By 2006, fees of approximately £600 were considered typical and, more recently, fees of £850 £1,000 were considered not uncommon.”