Taking an interest

The news, first reported on solicitorsjournal.com on 5 November 2009, that the Council of the Law Society has decided to call for a ban on referral fees will have been greeted with applause by some practitioners, dread by others and confusion on the part of the majority.

The greatest problem with the removal of the ban on referral fees was that the SRA was never convinced. Consequently, the liberalisation of the market was not accompanied by the necessary adjustment of certain crucial professional rules that would enable solicitors to manage referrals properly. The requirement for a solicitor to be independent, for example, has always run counter to the contractual arrangements between solicitors and claims management companies (CMCs) to follow the requirements of a referral company.

The decision of the SDT in the case of James Rhodes Beresford and Douglas Harold Smith (9 April 2009, SDT ref 9666 of 2007) illustrates the dilemma. One of the allegations the respondents faced was of failing to act in the best interests of clients by not providing any or any adequate advice to clients about contracts into which former miners had entered with a company called Vendside Limited. Under these agreements, Vendside agreed to refer miners to suitable solicitors. Those miners who were not then members the Union of Democratic Mineworkers (UDM) agreed to pay Vendside a referral fee from their compensation. The objectionable aspect of this arrangement, it was said, is that under the Mining Health Compensation Scheme Vendside was already being paid by the government for its work in referring miners to suitable solicitors. The arrangements differed from area to area and union to union. Some solicitors were required to deduct the money from the compensation and pay it to Vendside; others left this to the miners; and other firms of solicitors took a cheque from their clients and sent that to Vendside.

The Vendside agreement was entered into by the former miner prior to the solicitor becoming involved. Regular readers of this column will recall the unhappy fate of Mr Tilbury (see 'Staying on the right side', Solicitors Journal 153/26, 7 July 2009, and 'Such a lonely word', 153/21, 2 June 2009). Mr Tilbury was criticised for allowing his clients to enter into such agreements; once again these were agreements entered into prior to Mr Tilbury being instructed.

A similar situation arose in the referrals made by Vendside to Mr Beresford's firm. In his case, he and his partner took the view that the Vendside agreements were binding and there was no criticism which could be made about the agreement (rightly, as it turns out, see below).

The tribunal held (paragraph 157) 'in the circumstances of the case, the tribunal did not find this acceptable'. However, the tribunal stopped short of advising what solicitors should do when faced with a pre-retainer agreement which is apparently binding on the client. This is most regrettable, as it leaves solicitors with nothing to guide them in their dealings with clients except to realise that they will probably be criticised by the regulator; fined and ordered to pay costs to a regulator which simply does not understand the way the market has changed.

New guidance

So much so that on 13 November 2009 the SRA once again amended the 2007 code to make more onerous the obligations upon solicitors managing referred work, whether for a fee or not. The new guidance to rule 9 provides, among other things:

'If a client is entering into or has already entered into a scheme or arrangement with an introducer which is not in their best interests then you must advise the client accordingly. Schemes or arrangements which involve the client paying unnecessary or unreasonable fees will not normally be in the client's best interests.'

This reflects the outcome of the decisions in Tilbury and Beresford and Smith. The guidance has changed quite significantly and calls for careful study by all solicitors taking referrals whether paid for or not.

The new guidance should be set in the context of a recent decision on the Vendside agreement (and, by analogy, all such agreements). In August 2009, Blair J decided Brian Strydom v Vendside Limited [2009] EWHC 2130 (QB), in which the validity of the agreement was challenged. The judge held that the Vendside agreement was entirely unimpeachable and binding upon the former miner concerned. Quite what advice solicitors are supposed to give in the light of the court's finding in Strydom remains to be seen. Beresford and Smith has been appealed, but the judgment has yet to be handed down; the court may take the opportunity to clarify the position of solicitors in this situation.

Advice should be given to clients (and confirmed by letter) warning the client that he or she has entered into an agreement which did not serve their best interests. It would, of course, be inappropriate to advise that the terms of such an agreement should be broken. Guidance note 1 to rule 9 indicates that a solicitor should not enter into arrangements with claims management companies (CMCs) which are not in the best interests of clients. Note 1 implies solicitors should seek to persuade CMCs to change their business model or cease doing business with such companies.

All solicitors receiving paid for or free of charge referrals should urgently review their arrangements in the light of the new guidance in the code and seek advice in cases of any concern.