1 Research Specificatin: Cst Benefit Analysis f the impact f referral arrangements Purpse T assess the impact f referral arrangements n the market, analyse the impact f alternative plicy ptins and set ut a range f csts and benefits fr the Legal Services Bard t cnsider in its subsequent analysis. Backgrund The LSB has been set up t refrm and mdernise the legal services market place in the interests f cnsumers, enhancing quality, ensuring value fr mney and imprving access t justice acrss England and Wales. The LSB will achieve this pursuing ur regulatry bjectives and prviding regulatry versight fr the eight apprved frntline regulatrs 1. Referral arrangements are any arrangements under which business is received frm r referred t a third party. In the legal sectr, the third party can include anther lawyer r a nn legal business. Referral arrangements ften include the payment f a fee, but fees need nt be invlved. Regulatry data suggests that mst referrals ccur in cnveyancing (where estate agents intrduce clients fr a typical fee f 100) and persnal injury cases (where the intrducers are typically claims management cmpanies and insurers, where fees are thught t be , averaging arund 600). Sme lawyers als receive incme thrugh referrals, fr example a slicitr intrducing a client t a surveyr. Our investigatin will mainly fcus n referrals between lawyers and nn lawyers, but we will als lk at referral arrangements between different types f lawyer, e.g. slicitrs and barristers. Referral arrangements, especially when fees are invlved, are a cntrversial issue. Oppnents f referrals argue that they can intrduce cnflicts f interest and may cmprmise the quality f wrk as lawyers seek t recup payments fr referrals by saving csts elsewhere. Supprters f referral fees argue that such arrangements are cmmn acrss the ecnmy and are a mre cst-effective means than advertising f btaining wrk. Further, the Service Level Agreements impsed by intrducers safeguard quality. Claims management cmpanies in particular argue that referral fees can imprve access t justice, as withut their marketing activities the public may therwise be unaware f their right t bring valid claims fr persnal injury. In recent years the impact f referral fees n the market has prvked significant debate with research reprts published by The Law Sciety 2 and the Assciatin f British Insurers 3. Fllwing their 2007 reprt The Law Sciety annunced that they wuld back referral fees tgether with strict rules aimed at ensuring slicitr s independence 4. The regulatin f referral fees is, similar t ther areas f law, patchy with the different Apprved Regulatrs each taking different appraches (see Annex B). This research wuld need t cut thrugh 1 The Law Sciety, General Cuncil f the Bar, Cuncil fr Licensed Cnveyancers, The Institute f Legal Executives, The Chartered Institute f Patent Attrneys, The Institute f Trade Mark Attrneys, Assciatin f Law Csts Draftsmen, Master f the Faculties. 2 Referral arrangements and legal services research reprt 3 Marketing Csts fr Persnal Injury Claims: Evidence f Market Failure, ABI, TLS 2007 Referral Fees Statement pg. 1
2 the different regulatry appraches t imprve ur understanding f the verall impact f referral fees. The Assciatin f British Insurers in its 2009 reprt were cncerned that high referral fees were artificially raising the cst f persnal injury claims. In Nvember 2009 The Law Sciety annunced in change f plicy that it was seeking the ablitin f referral fees 5. As versight regulatr fr legal services the LSB has a duty t cnsider the verall impact f referral fees n the market and determine whether they wrk in the best interests f cnsumers. Existing research evidence is summarised in Annex A. T supprt the LSB, the independent LSB Cnsumer Panel has been asked t investigate the cnsumer perspective n referral fees. They are cmmissining a separate research prject t explre referral fees qualitatively with cnsumers. The qualitative research, which is being cmmissined by the Cnsumer Panel, will explre a range f issues including: whether cnsumers shp arund when they are referred t a lawyer, cnsumer perceptins f service quality and the value that cnsumers place n marketing. Prject materials and early sight f results will be available as part f this prject. Aims and Objectives Given recent calls frm The Law Sciety t ablish referral fees and the current investigatin frm the LSB s Cnsumer Panel the LSB are keen t develp rbust evidence base t supprt any subsequent regulatry interventin. The LSB will nly frm a view f whether any regulatry inventin is required and if s what, nce we have sufficient evidence. This research is intended t fill the evidence gap by prviding rbust ecnmic analysis f the impact f referral fees n market utcmes. The research shuld set ut the csts and benefits f existing rules fr permitting referral arrangements and assess the relative csts and benefits f alternative plicy ptins. In particular the research shuld cnsider the relative csts and benefits f: N change t existing rules. Requirement f firms t publish referral fee arrangements in an agreed frmat. Capping referral fees as a prprtin f charge. Banning all referral fees. Banning all referral arrangements. The research shuld cnsider bth the impact n the market f each ptin, but als the regulatry cst impsed by different ptins. The research shuld als indicate whether the csts and benefits fall n cnsumers r as a reductin in the prfitability f the sectr. Equally the research shuld determine whether the impact f any plicy ptin falls disprprtinately n any particular segment f the market. 5 Law Sciety Cuncil vtes against referral fees The Law Gazette pg. 2
3 The research shuld prvide rbust evidence that will be used by the LSB t determine what, if any, regulatry actin shuld be taken t address industry cncerns ver the use f referral arrangements. Issues and scpe Referral arrangements are ften seen as a substitute fr marketing csts, particularly in legal services where there are few husehld brands supplying services. Rather than pay fr advertising, lawyers buy and sell client data s that individuals can be targeted directly. Lawyers are restricted in their ability t advertise their services directly The research shuld cnsider the impact f referral arrangements n: access t justice D referral arrangements result in mre peple receiving justice than wuld therwise be the case? If yes, hw big is the effect? Des the impact f referral arrangements fall differently n different types f custmer? Hw wuld cnsumers find a lawyer in the absence f referral arrangements? D referral fees lead t an increase r decrease in the supply f services? D they alter the way in which services are prvided in a way which causes detriment/benefit? quality f service Hw d referral arrangements affect the quality f service ffered t custmers (are they leading t great efficiency r lwer quality)? What differences exist between the quality f service ffered by lawyers using referral arrangements and thse wh dn t and what value d cnsumers place n this difference? cst f service What impact d referral arrangements have n the cst f legal services? In the absence f referral arrangements what wuld legal firms d t attract clients? This research is likely t pse a number f challenges, in particular: the LSB acts as versight regulatr fr all legal services, any research wuld therefre have t cnsider hw referral arrangements affect different types f legal service prvider (see Annex B fr a summary f the rules); pg. 3
4 a number f research studies already exist, the researcher will have t determine hw best t build n these existing studies; quality is nt easy t measure in legal services where prblems may nly emerge years later (e.g. when a huse is resld), the researcher will have t determine hw best t prxy quality; services prvided are nt always hmgenus and cst infrmatin may be difficult t standardise; results shuld be disaggregated t allw analysis f the impact n different grups f cnsumers and categries f law; many legal services firms are relatively small high-street firms while intermediaries, such as claims management cmpanies, are natinal firms with significant market pwer; significant changes t referral fee arrangements will impact n ther markets, the research shuld cnsider in analysing ptins the relative scale and type f impact n these ther markets e.g. claims management, insurance, estate agencies etc.; the Legal Services Act 07 places a series f regulatry bjectives n the LSB nly ne f which relates t cmpetitin and we welcme views n the interactin f these bjectives in the light f the utcme f the research. Tender Evaluatin Criteria All prjects cmmissined by the LSB are subject t ur standard terms f cntract. Tenders will be evaluated n best value fr mney and will be assessed n the basis f: 1. Overall cst. Please include apprpriate breakdwns 2. The extent t which tenders are clearly written and meet the specified bjectives, present a sund methdlgy, identifying any ptential prblems, and prpsing suitable slutins 3. Address utputs and ensure these are in line with requirements and the required timing f the prject 4. Prpsed team cmpsitin, expertise and management and the rganisatin s diversity plicy 5. Hw diversity issues wuld be addressed in the research. Deliverables Output The utput fr this research shuld be an executive summary, a shrt reprt (n mre than 50 pages) with supprting evidence that addresses the specificatin. The reprt shuld be suitable fr publicatin, althugh any decisin t publish will remain with the LSB. It is essential that the reprt and underlying research is sufficiently rbust s that the LSB can use this in discussins with external stakehlders. The research shuld have clear cnclusins that the LSB will cnsider in develping future plicy prpsals. pg. 4
5 Researchers shuld expect t present the results f this analysis n a small number f ccasins (up t 4). Please cst fr this separately. The LSB will retain wnership f the research, reprt and any underlying data. pg. 5
6 Prject plan Tenders shuld include a prject plan and time schedule fr the wrk that identifies the main task and key milestnes that will be used t mnitr prgress. The plan shuld be accmpanied by a resurce prfile, giving a breakdwn f the resurces in persn days allcated t each task. Duratin The research shuld cmmence in Tenders shuld set ut dates fr cmpleting key milestnes such as infrmatin gathering, analysis, synthesis and reprt writing. Interviews with all shrtlisted cnsultants will take place n 14 and 15 January. The first draft shuld be submitted t the LSB by 30 March, with the finalised reprt due by 30 April Legal Services Bard Cntact Details Tenders with any queries abut the research specificatin shuld cntact: Plicy team: Lesley Davies Research: Alex Ry Tenders must be submitted by 5pm n 11 January pg. 6
7 Annex A Existing Research Evidence n Referral Arrangements Market Picture Numbers f firms with referral arrangements, and in what sectrs: As at 2007/08, 18% slicitr firms (SRA regulated) had referral arrangements. 39%f these relate t cnveyancing and 39% t persnal injury matters. All ther categries f wrk accunted fr 1% r less f all referral arrangements. (SRA Bard Paper, December 2008, Item 4) Based n calculatins frm numbers in Multn Hall (2007) (frm REGIS database) arund 30% f firms practising cnveyancing have referral arrangements, 40% firms practising PI have referral arrangements and 32% f firms cnducting bth PI and cnveyancing have referral arrangements. Assc. f PI lawyers (APIL) (2007 survey f 787 members) fund that 53% f respnding members were invlved in a referral fee r fee-sharing arrangement. Hw are any referral fees paid: mstly n a fee-per-case basis, paid after the case has been accepted by a firm. Other, less cmmn, arrangements include payment f an annual fee r a marketing fee. Hw much is a single case payment: PI /case, n average 600 (Multn Hall, 2007). Cnveyancing - 50 t 700/case and averaging frm 75 t 125/case (Multn Hall, 2007) APIL (2007 survey f 787 members) fund that the majrity f firms paying referral fees were paying per case (77%). The highest level f mentins is in the categry. Arrangements where firms pay referral fees nly are much mre cmmn than fee sharing nly arrangements r any cmbinatin f fee sharing and paying. Oxera (2009 fr ABI) fund that the per case referral fee fr PI has been rising - frm arund 400 in 2005, t arund 600 in 2007, t in excess f in Oxera (2009 fr ABI) fund ther legal wrk basic single wills ( 20), prperty trust wills ( 70), uncntested divrce first stage ( 75), cnveyancing ( , median 100), discretinary trust wills ( 100), divrce ancillary relief ( 150), emplyment law ( 300) Reliance fr business: Multn Hall (2007) - firms with less than 5 partners, 10-15% f verall business cmes frm paid intrductins and fr firms with 5 partners r mre the prprtin is 2-5%. In the main, business still cmes t firms via recmmendatin and repeat business. APIL survey (2007) - 27% f respndents are heavily reliant n payment f referrals fees fr PI wrk - with ver 80% f their persnal injury wrk cming thrugh this rute. APIL (2007 survey) fund that 19% f respndents PI wrk was linked t an LEI panel. APIL (2007 survey) - f thse wh carry ut persnal injury wrk linked t LEI panels, 80% pay referral fees and/r have a fee sharing agreement. Of thse nt linked t LEI panels, almst half (49%) still pay referral fees r have fee sharing arrangements. pg. 7
8 APIL (2007) LEI panel members are mre likely t have a high prprtin f their PI wrk cme thrugh paid fr referrals. 59% f firms linked t LEI panels gain 61% r mre f this wrk frm paid fr referrals cmpared with 44% f firms nt linked t LEI panels. Number f referrers per slicitr firm: PI - 1 t 4 fr firms with less than 5 partners and frm 3 t 60 fr firms with 5 r mre partners. (Multn Hall reprt, 2007) Lawyers csts in PI Oxera (2009) PI defendant slicitr csts are arund 20-35% lwer than claimant slicitr csts. Areas f nn-cmpliance In the first half f 2008, in respect f rule 9.02(b) (the requirement fr an undertaking frm the intrducer t cmply with the rule) the level f nn-cmpliance remains high at 58.9%. In the first half f 2008, in respect f rule 9.02 (g), the requirement fr disclsure by the slicitr, 43.3% f firms breached this requirement. SRA cmment - althugh the level f breaches f rule 9 appears t be high, nly a small number f the PSU matters appeared t invlve ptentially serius miscnduct. The number f cmplaints received in respect f referral arrangements als appears t be very lw. Recipients f referral fees frm slicitrs and cnveyancers include: CMCs Insurers Real-estate agents Prperty develpers Trade unins Website matching /referral sites Other, nn-web-based, intermediaries eg. Legal Referral Services Limited wh links funeral directrs and slicitrs (referral fee t intermediary, wh then passes share t riginal referrer) Other misc. third parties (eg. garages, hairdressers, etc) Other lawyers Surveyrs? Mdels f Payment There are a range f different mdels f fees sme mre transparent than thers. Slicitrs/Cnveyancers may pay a third-party directly fr each case t referred t them Slicitrs may pay ne third party (eg. an insurer) t be n their slicitr panel (this culd be by the case referred r by an annual/quarterly fee). Cases are then referred t the slicitr by a different third party (eg. the insurer s brker r a CMC that the insurer uses). This means that the recipient f referral fee (eg the insurer) des nt d the actual referring. pg. 8
9 Slicitrs may pay a referral fee t a third party intermediary, wh then pays anther third party fr referring the client initially. Slicitrs may als prvide free f charge business in place f paying a referral fee eg. prvide anther service free t a trade unin in exchange fr all PI wrk. Slicitrs/Cnveyancers may als pay t be members f a referral r matching website this culd be n a case basis r via an annual fee r membership. Referral fees received by slicitrs fr recmmending clients t ther services It may be that surveyrs pay referral fees t slicitrs/cnveyancers Equally, insurance cmpanies may pay referral fees fr a slicitr t recmmend a certain prduct (eg. ATE insurance) need t check! Culd financial advisrs as well? Referral fees received frm ther lawyers Other sectrs Referral payments are allwed t be made by insurers t financial service prviders, as well as with ther third parties Referral fees are banned fr inslvency practitiners D insurers pay CMCs t recmmend their prducts, r just cmmissin? HIPs prviders pay referral fees t real estate agents this is cmpletely unregulated. Unregulated referral arrangements als exist in all srts f ther sectrs, eg. between interir designers and furniture makers (this culd be a percentage r a flat fee). This seems t be typically passed nt clients. In Canada, investment fund managers can have referral arrangements (mstly in receipt f payments), subject t disclsure. Findings f Current Research Studies Legal sectr Mstly based n studies f lawyers views and lawyers experiences Mst prevalent in PI, then in cnveyancing, but ccurs in ther fields as well. Many studies find that many lawyers dn t want them. APIL undertk a survey in It fund just ver half its members were invlved in referral fee r fee sharing arrangements. General findings included fees being t high. APIL wants mre stringent enfrcement and cntrl fr referral fees als issues abut cnsumer chice and limiting access t justice. A Hampshire Incrprated Law Sciety review f referral fees in 2006 fund that 95% f members were ppsed t the allwing f referral fees. But, less than 10% f respndents paid referral fees. Cnsumer views Research undertaken by SRA finds that it isn t a cncern because thse surveyed haven t heard very much back abut. pg. 9
10 Anther SRA survey als fund that nce they explained referral fees t cnsumers, they were nt cncerned abut them. Other pints Trade unins seem t be exempt frm disclsure (see Multn Hall reprt fr SRA 2007) Cmmissins are essentially anther frm f referral fees. Ability t pay fees seems t influence likelihd f being selected t be n slicitr panels, such as insurers LEI panels. Sme insurance firms d nt allw slicitrs wh are nt members f panels t act fr clients (see APIL 2007 survey). Much f the discussin arund whether t ban r nt fcuses n whether referral fees are bringing the slicitr prfessin int disrepute, whether it affects their independence and the impact f staffing within law firms (eg. increasing use f lwer paid and less qualified staff is ne issue cited). pg. 10
11 Annex B Table 1: summary f rules fr use f referral fees Type f Authrised Persn Regulating bdy Permissibility f Referral Fees Slicitr SRA Referral fees between lawyers permitted Referral fees between lawyers and nnlawyers permitted, subject t Rule 9 f the SRA cde and guidance Fee-sharing permitted between lawyers, subject t SRA Cde Law Sciety has called fr a ban n referral fees Barrister BSB Referral fees banned under Rule 307 f the Cde f Cnduct. Public access barristers can pay t advertise n a website, prvided ptential clients generated by the website cntact the barrister directly. Clients can als pay a cmpany t be intrduced t a public access barrister, prvided n mney changes hands between the public access barrister and the referral cmpany. Cnveyancer CLC Referral arrangements (payment and receipt) permitted subject t rule 5.2 and guidance 6 Legal Executive ILEX Prfessinal Standards Referral fees appear t be permitted, subject t cmpliance with SRA rules n this matter. Trade Mark and Patent attrney s IPREG There des nt appear t be anything specific abut referrals/intrductins in the Cde f Cnduct that wuld either allw r ban referral arrangements s therefre assume allwed. Law Cst Draftsmen ALCD N specific reference in rules. ALCD has advised that T date there has been n restrictin upn the basis f charging structure f the membership wing t the fact that this was cnsidered t reflect restrictive practice Ntaries Faculty Office Referral fees permitted under Practice Rule 13. pg. 11
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