SRA fires warning shots over referral fee ban and “reckless trading”

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Payment: must be justified on the basis of the services firms are receiving

Law firms will be held responsible for breaching the personal injury referral fee ban if they sign up to ventures that appear to be genuine joint marketing schemes but prove illegal, the Solicitors Regulation Authority (SRA) has warned.

Meanwhile, the authority has said that senior individuals within firms that “recklessly trade into insolvency” will suffer practising certificate conditions or even be pursued into the Solicitors Disciplinary Tribunal (SDT).

Speaking at a conference of compliance officers for legal practice and for finance and administration (COLPs and COFAs) in London yesterday, SRA director Samantha Barrass made clear that the SRA was anticipating schemes that “may be used either unintentionally or deliberately to hide the payment of a prohibited referral fee”.

She added: “Simply re-badging an arrangement with, for example, a claims management company (CMC) as a joint marketing scheme on the basis that the CMC does some advertising, and possibly changing the charging structure from a payment per case to a lump sum, will not be enough.

“We expect firms to be able to demonstrate that the payments they make can be justified on the basis of the services they are receiving, be that marketing or any other service. We will be looking at the substance of the arrangement rather than just how it is labelled.”

Ms Barrass acknowledged that the ban created difficult judgements, but pinned responsibility for making them firmly on the purchaser of services. “There is a referral and there is a payment, but is the payment for the referral? The best people to answer that question are the people making the payments. They know what they are paying for.”

She gave the example of a CMC operating a scheme whereby firms pay a fixed monthly fee calculated on the basis of the cost to the CMC of advertising and dealing with subsequent calls. There was no guarantee the firm would receive any referrals and no provision for the fee to be increased if the response was better than expected.

“In this scenario we would expect the firm to be satisfied that what they were paying into the scheme could be justified on the basis of the services they are being provided with – the advertising, call handling etc – and not just take the CMC’s word that the scheme is compliant because it is a lump sum rather than a ‘per case’ payment,” she said.

Where firms could show “adequate due diligence and monitoring of business arrangements they have entered into to ensure they are receiving value for money” the SRA was “more likely to be satisfied that the arrangements are compliant, or at the very least that the firms are making every effort to ensure compliance”.

In particular, firms that until April were dependent on personal injury referral fees “should already have business continuity plans in place as part of the firm’s risk management system and controls”, said Ms Barrass, warning that “those firms which have taken the decision not to consider the viability of their businesses going forward risk regulatory action”.

The SRA would take a similarly hard line where firms took risks in terms of borrowing heavily or failing to act when they found themselves in financial difficulty, she said. Senior individuals in firms that “recklessly” traded into insolvency or failed to act with integrity when facing insolvency would be subject to regulatory enforcement action – such as having conditions placed on their PCs – to prevent them from moving to another firm “without consequences”.

Ms Barrass said: “Yes we are taking a hard line on this, and our actions reflect the risks. We believe there need to be strong deterrents for those putting the interests of their clients at risk and imposing costs on the rest of the profession.

“In particular, we fundamentally do not think it is right that firms that are run responsibly, diligently and effectively pick up the tab for those that aren’t – which is what happens when firms in financial difficulty do not do all they can to ensure an orderly wind-down.”

You can read the full speech here.