Closed Consultation

Part 1 - discussion

• 1.

  This consultation invites views on our proposals for implementing the ban on referral fees in personal injury cases, which is set out in the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) and is expected to come into effect in April 2013. It builds on the foundations laid in the discussion document we published in June, outlining our early thoughts.

• 2.

  We are grateful to those who responded to the discussion document. The responses provided us with a wide spectrum of views, from both claimant and defendant lawyers; and their representatives, trade unions and introducers.

• 3.

  In this formal consultation we:

  • discuss the responses to our June discussion document and how we propose to deal with the issues raised;
  • set out our proposals for implementing the relevant provisions of LASPO, including revised/new outcomes and indicative behaviours;
  • include information for the profession about how we will interpret the provisions of LASPO for regulatory purposes;
  • set out our draft strategy for supervision and enforcement
   
• 4.

  Any changes that we make to the regulatory framework will come into effect in April 2013.

Scope of this consultation

• 5.

  The profession and stakeholders have for a number of years been divided in their views on referral fees and we have seen credible arguments both for and against them. However, the purpose of this consultation is to discuss how the SRA can adopt a consistent and workable approach to implementing the ban, informed by the views of all stakeholders.

• 6.

  We particularly welcome views from the practitioners and firms we regulate, consumers of legal services, other regulators and those who refer work to lawyers.

Responses to the discussion document

• 7.

  The June discussion paper set out options for implementing the ban in a way that is practical, enforceable, reflects the intention of the legislation and is consistent with the SRA's outcomes-focused, risk-based, approach to regulation and the approach of other regulators. In particular, we asked for views on:

  • the effect of the ban on the legal services market and the impact it may have on regulated entities;
  • the scope of the ban and potential changes to the regulatory framework;
  • our approach to supervising and enforcing the ban; and
  • outcomes-focused and risk-based regulation and its application.
   

Themes arising from the responses

Lack of clarity in LASPO

• 8.

  It is clear from the responses that there is scope for interpreting the provisions in LASPO in different ways and that there is some lack of clarity about which practices and business models which might be affected by the ban, particularly in relation to issues such as "pooled marketing resources" and payments for services. Many respondents felt that the SRA should provide clarity, either through prescriptive rules or detailed guidance describing exactly the kinds of arrangements that will or will not be acceptable.

  "…Unless there is extremely full and easy to understand guidance and clarity provided it is difficult to see how any law firm can formulate a proper business plan to stay in this sector…"

  "…it is appropriate for the profession to be given clear guidance illustrating what is believed by the regulator to be permitted and what is caught by the Act…"

  "The issue is not one that be simply dealt with by leaving it to firms to apply OFR since government have asked regulators to give effect to the legislation."

   
• 9.

  However, it was also recognised that the more detail provided in rules/guidance the more scope there would be for argument about its meaning and application.

  "…the key outcome should be only to enter into arrangements that comply with the law. The more that is expanded, the more scope there then comes for argument…"

   

SRA response

• 10.

  Regulated persons should be able to determine from LASPO itself the arrangements which will be prohibited and the risks associated with entering into referral arrangements. The SRA does not intend to provide regulated persons with ‘pre-approval of business models. However, we accept that a lack of clarity is not helpful, either to the profession or to clients and the wider public who need to be able to have confidence in the profession and the way it is regulated. We have therefore, produced our own interpretation and analysis of the relevant provisions of LASPO and how these might affect various kinds of arrangements. (See Part 3 of this consultation)

• 11.

  Ultimately, in an outcomes-focused regulatory landscape, it will be for practitioners themselves to ensure their own compliance with their legal and regulatory requirements and we expect firms to make their own decisions on whether their arrangements are compliant. LASPO specifically puts the burden of proof to evidence this on the individual firm. Our analysis of the Act is intended only to show practitioners how we will interpret the Act in complying with our obligations to monitor and enforce the relevant provisions of LASPO. We cannot advise on every possible scenario, and it is as much the way an arrangement is carried out in practice, as how it is described, that determines whether it is compliant with the legal and regulatory requirements.

Policing the ban

• 12.

  A number of respondents expressed concerns about the SRA’s ability to police the ban and the likelihood that arrangements would simply be "rebadged" to appear compliant or be set up in a deliberately complex way to evade proper investigation.

  "The ban on referral fees is likely to remove the existing transparency and simply drive arrangements underground."

   
• 13.

  Many of these concerns are linked to fears that attempts will be made to "get round the ban" by people trying to disguise referral fees as something else. Reference was also made to the difficulties experienced by the Law Society in regulating its ban on referral fees prior to it being abolished in 2004.

SRA response

• 14.

  One of the objectives of outcomes-focused regulation is to enable the regulated community to take responsibility for their own compliance with legal and regulatory requirements. This allows the SRA and the regulated community to have a constructive relationship which encourages compliance and leads to changes in behaviour where appropriate.

• 15.

  We intend to issue a Supervision and Enforcement Strategy in respect of referral arrangements in personal injury cases, which sets out our broad approach. A draft of this strategy forms part of the consultation.

• 16.

  The experience of referral arrangements before the ban was lifted in 2004 was that some businesses went to great lengths to justify their arrangements and a considerable amount of investigation was needed to fully understand them. There may be attempts to "get round the ban" as well as cases where it is unclear whether or not there is a breach. We believe that our outcomes-focused approach will allow us to look at the substance of an arrangement, rather than just its form and focus on those arrangements that pose a real risk to the public interest. We will assess arrangements which have been "dressed up" to appear compliant, when the underlying purpose of the arrangement is something different as high risk. In this regard we would remind those we regulate of the Principles that underpin our regulatory regime, in particular the need to act with integrity and to behave in way that maintains the trust the public places in them and in the provision of legal services.

• 17.

  Further, section 57 of LASPO allows regulators to treat certain payments as referral fees unless the regulated person can show that the payment was for the provision of a particular service or for another reason, and not for the referral. We intend to make use of this provision and therefore the onus will be on the regulated person to show that a payment that is said to be for services is reasonable and does not include the payment of a referral fee.

A level playing field and liaison between regulators

• 18.

  A number of respondents commented on the need for consistency between the relevant regulators and for regulators to work together on investigations.

SRA response

• 19.

  We continue to work closely with the other relevant regulators, in particular the claims management regulator to ensure a consistent approach, as far as possible and that we work together in investigating any arrangements that cause concern.

Effect of the ban on firms

• 20.

  In the discussion paper we asked about the impact stakeholders believed the ban would have on their business and the market.

  "…It is entirely possible that a number of businesses will either leave the market entirely or will simply cease to exist due to financial constraints…"

   
• 21.

  Some respondents voiced concerns over the survival of smaller practices who have up until now have relied on referrals from, for example, claims management companies, as they themselves lack resource "…to promote their businesses individually in a highly competitive marketplace…". A number of respondents were concerned about the impact of ABSs on the market, for example that they would lead to the disappearance of small firms, who would either be taken over or unable to compete, which in turn would reduce access to justice and choice for consumers.

SRA response

• 22.

  These issues raise wider questions than just how we will implement the ban. Our own analysis of the information we hold about firms indicates that some firms are highly dependent on personal injury referrals, and may be at risk not just from the ban, but from a likely shrinkage of the personal injury market over the next few years, as a result of factors such as the changes to the costs regime.

• 23.

  Our Supervision function, when engaging with firms, are seeking comments from practitioners as to their future plans, especially where the firm’s area of work is personal injury and they are heavily reliant on referral arrangements.

• 24.

  We appreciate that the ban will inevitably bring with it issues that pose a risk to the regulatory objectives. We have in particular identified the following issues:

  • financial stability;
  • integrity/independence; and
  • undesirable business models.
   

• 25.

  We will look to engage with firms/individuals to ensure that these, and any other risks we identify, are being mitigated.

Alternative Business Structures (ABS)

• 26.

  As well as concerns about the impact of ABSs on the market, respondents were also concerned that ABSs would allow firms and claims management companies (CMCs) to "get round" the ban.

SRA response

• 27.

  An ABS is a legitimate form of business, supported by a strong statutory and regulatory framework. It is not an easy option. It will be a "regulated person" for the purposes of LASPO and any referrals made or received by the ABS will still be subject to the legislation and our regulatory requirements - including referrals made between different entities within a group structure.

• 28.

  We will look closely at applicants’ proposed referral arrangements. Where, for example, a firm and a CMC apply to become an ABS, we will carefully scrutinise the application and the proposed business model. Models which suggest an intention to continue as more than one business, with referrals being made between them, may not be licensed, if we believe the referral arrangements will be unlawful. Applicants will need to demonstrate that they are truly operating as one entity and if referrals are made to another part of the business within a group structure, that these comply with LASPO and our regulatory requirements.

Joint marketing/advertising schemes

• 29.

  A number of responses discussed the arrangements they have in place with third parties involving advertising/marketing and whether they would be caught by the ban.

SRA response

• 30.

  Many firms have arrangements with third parties who provide marketing/advertising services. Some of these arrangements have also involved referrals of clients. The Government has stated publicly that it was not their intention to prevent firms pooling their marketing resources, although LASPO does not deal specifically with payments for marketing/advertising and there is no definition of a "joint marketing scheme".

• 31.

  However, section 57(8) provides that referrals by or to a firm or an arrangement which appears to the SRA to be a referral fee may be treated as such unless the firm can show that the payment was made as consideration for another service and not for the referral. We are likely to look beyond arrangements merely titled as 'marketing agreement/joint marketing schemes' and examine what service(s) the firm receives for the payment made.

Equality impact

• 32.

  We are considering the equality impact of our proposals for implementing the ban and regulating arrangements in personal injury cases. The impact of LASPO has required us to review our approach to regulating firms who have arrangements for the referral of work in personal injury cases and dealing with the associated risks. We will focus on the potential equality impact of our approach on the profession generally, firms that undertake personal injury work and those who source such work from introducers.

• 33.

  The ban could have an impact on consumers as they may experience difficulties in finding a suitable solicitors where previously they have relied on CMCs contacting solicitors on their behalf. The impact on consumers is to be considered further. However, it is not envisaged that any changes made to our regulatory approach will have an impact on consumers.

• 34.

  It has been suggested that smaller firms/sole practitioners will be forced out of the legal services market as they may not be in a position to secure client leads without the benefit of referrals. These firms may reconfigure their business model, for example, diverting their resources to other areas of work or merging with other practitioners. We will continue to work with the Sole Practitioners Group and other representative groups to discuss views and opinions.

• 35.

  Another concern raised is that the ban will lead to an increase in the cost of regulation and that the profession will have to bear these costs. At present, no evidence has been presented which suggests that the profession will be subjected to increased costs. Firms may have to reconsider their marketing/advertising strategies; however, it is not envisaged that these costs will be substantially higher than the referral fees paid at present.

• 36.

  We envisage that we will need to assess the equality impact of the ban in further detail once it comes into force and a full equality impact assessment will then be carried out.

Timescales and next steps

Formal consultation process on our proposals	23 October 2012 to 18 December 2012
SRA referrals symposium	19 November 2012
Code changes to be approved by SRA Board	23 January 2013
Changes to Regulatory Framework approved by LSB	Mid February 2013
Final version published	Early March 2013
Implementation of ban	April 2013

Part 2 - Proposed changes to the SRA Handbook

• 1.

  We do not believe that detailed rules would be consistent with outcomes-focused regulation; nor that creating a provision in the Code of Conduct duplicating section 56 of the Act would be appropriate or helpful. Making the prohibition wider than required by the Act would, in the absence of evidence of public detriment sufficient to make such a regulatory intervention, be precipitate. Adopting a narrower approach would be unlikely to comply with our obligations under LASPO.

• 2.

  As we have said, section 57 of LASPO allows regulators to make rules to the effect that some payments by or to a regulated person may be treated by the regulator as a referral fee, unless the regulated person can show that the payment was for the provision of a particular service or for another reason. We intend to make use of this provision and incorporate it into the outcomes in the Code of Conduct.

• 3.

  We therefore propose to include the following new mandatory outcomes in Chapters 6 and 9 of the SRA Code of Conduct:

  Chapter 6

  Outcome: you are not paid a prohibited referral fee;

  Chapter 9

  Outcome: you do not pay a prohibited referral fee;

• 4.

  The terms in italics will be defined in the SRA Handbook Glossary as follows:

  - prohibited referral fee means:

  a payment prohibited by section 56 of LASPO; or
  pursuant to section 57(8) of LASPO, a payment made to or by you which appears to the SRA to be a referral fee for the purposes of section 57(7) of LASPO, unless you show that the payment was made as consideration for the provision of services or for another reason and not as a referral fee.

  - paid has the same meaning as it does in section 56 of LASPO and "pay" and "payment" shall be construed accordingly.

  - LASPO means the Legal Aid, Sentencing and Punishment of Offenders Act 2012.

• 5.

  These outcomes will be supported by indicative behaviours, which will indicate the kinds of behaviour that will tend to show whether or not the outcomes have been achieved. For example:

  • (i) having effective systems in place for assessing whether any referral arrangement complies with statutory and regulatory requirements;
  • (ii) having effective systems to ensure that any payments you make for services, such as marketing, do not amount to the payment of unlawful referral fees;
  • (iii) retaining records and management information to enable you to demonstrate that any payments made are lawful;
  • (iv) ensuring that payments made for products and services to a referrer or connected party are made at the current market rate.
   

• 6.

  These proposed new outcomes will need to be read alongside the other outcomes in chapters 6 and 9, as well as the SRA Principles and other relevant outcomes, such as those relating to client care and conflicts of interests. Our definition of a referral, for the purposes of Chapter 9, will remain the same i.e. "includes any situation in which another person, business or organisation introduces or refers a client to your business, recommends your business to a client or otherwise puts you and a client in touch with each other".

• 7.

  This means that there will be some arrangements that, whilst not breaching the LASPO provisions, will still be considered a referral for the purpose of the Code of Conduct and will still be subject to the relevant outcomes. This is because we believe that our wider definition provides important consumer protection by ensuring transparency, and the primacy of the client’s interests, in relation to a wider range of arrangements. For example, we consider it important that where a third party recommends a particular firm, the client is aware of any financial arrangement and can make an informed decision about the recommendation.

Part 3: Draft guidance - The prohibition of referral fees in the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) Sections 56-60

• 1.

  As of 1 April 2013, LASPO prohibits the payment or receipt of referral fees in claims for damages following personal injury or death.

• 2.

  This document provides an overview of the approach the SRA will adopt in determining whether or not a regulated person has paid a referral fee contrary to section 56 of LASPO. This document should be read in conjunction with the SRA's supervision and enforcement strategy for the ban on referral fees.

• 3.

  The information provided within this document is intended to facilitate an understanding of the SRA’s approach in this area and should not be relied upon as legal advice. Regulated persons will need to satisfy themselves of compliance with the requirements of LASPO and may be required to demonstrate compliance to the SRA.

• 4.

  This document does not form part of the SRA Handbook and is not mandatory, but the SRA may have regard to it when exercising its regulatory functions. This note will be reviewed periodically.

Application of the ban

• 5.

  A regulated person will be in breach of the LASPO if that person:

  • (a) refers ‘prescribed legal business’ to another person or is referred ‘prescribed legal business’ by another person; and
  • (b) pays or is paid for the referral. (See section 56(1))
   

• 6.

  For example, if a solicitor is referred a client who is instructed in connection with prescribed legal business and the solicitor pays for the referral, this will be a breach of LASPO.

• 7.

  A regulated person will also be in breach of LASPO if in providing legal services in the course of ‘prescribed legal business’ that person arranges for another person to provide services to the client and is paid for making that arrangement (Section 56(2)). For example, if a solicitor is acting for a client in respect of ‘prescribed legal business’ and receives a payment from an insurance company for arranging after the event insurance for the client, this will be a breach.

What is a regulated person?

• 8.

  "Regulated person" for the purpose of the ban is a claims management company (CMC), any person authorised by the Law Society to carry on reserved activities within the under the Legal Services Act 2007, Insurers (subject to the Treasury making regulations to enable the Financial Services Authority to monitor and enforce the ban) and any other person specified in regulations made by the Lord Chancellor.

What is prescribed legal business?

• 9.

  "Prescribed legal business" is defined as business which involves the provision of legal services to a client in respect of:

  • a claim or potential claim for damages for personal injury or death;
  • any other claim or potential claim for damages arising out of circumstances involving personal injury or death (ancillary claims); or
  • other claims or business specified in regulations made by the Lord Chancellor. (At the time of publishing this document no such regulations have been made.)
   
• 10.

  LASPO therefore, not only prohibits the payment and receipt of referral fees for claims for damages for personal injury, but also for other claims for damages arising from the same circumstances. For example, if a personal injury claim resulting from a road traffic accident is referred to a solicitor, together with a claim in relation to uninsured loss recovery resulting from the same accident, the solicitor could not pay a referral fee in relation to either claim. In other words it is not possible to claim that a referral fee is for a related claim rather than for the personal injury claim.

Client

• 11.

  "Client" is defined for the purpose of section 56(4)(a) as the person who makes or would make the claim. Although not specifically stated in the Act, we believe this definition is intended to apply also to section 56(2) of LASPO. We do not consider that the payment of a fee in connection with a defended claim for personal injury or death will ordinarily be prohibited by LASPO (though care should be taken in case there is a counter claim in a matter).

What is a referral?

• 12.

  There is a referral of prescribed legal business if –

  • (a) a person provides information to another;
  • (b) it is information that a provider of legal services would need to make an offer to the client to provide relevant services; and
  • (c) the person providing the information is not the client.
   

• 13.

  Sections 56(5) and 56(6) of LASPO provide definitions of "relevant services" and "legal services".

• 14.

  We consider that the communication of a client's name and contact details to or by a regulated person would amount to a referral, as this information would enable the recipient to make an offer to the client to provide relevant services.

• 15.

  Example: An insurance company has an agreement with a firm of solicitors for the referral of clients. The insurance company is contacted by the claimant who notifies the Insurer of a claim involving personal injury. The client’s details are provided to the firm, who write to the claimant/client offering their services. There is a payment for each client referred.

  This would be regarded as a prohibited referral fee.

• 16.

  Example: A website offers to find a suitable firm of solicitors for members of the public. The potential client is required to input their postcode and the area of law in which they need help. They then receive an email providing contact details of a suitable firm in their area. The firm pays a fixed annual fee to be part of the scheme and a further payment in respect of each potential client who is given the firm’s details.

• 17.

  We do not consider that this amounts to a referral within the terms of LASPO as the potential client’s details are not being provided to the firm. (However, the transparency requirements set out in Chapter 9 of the SRA Code of Conduct 2011 would still apply.)

What is a payment?

• 18.

  Payment includes any form of consideration, whether the benefit is received by the regulated person or a third party. Reference to payment to a third party has been included to prevent the situation where, for example, a regulated person sets up a subsidiary another entity to receive referral a fee, or otherwise arranges for someone else to receive the payment.

• 19.

  Payment does not include the provision of hospitality that is reasonable in the circumstances. What is reasonable will be considered on a case by case basis.

When is there a payment for a referral?

• 20.

  Our view is that where there is a referral of a matter to or by a regulated person, or an arrangement for another person to provide services, a payment will be prohibited to the extent that it is being paid for the referral or arrangement. Where a payment is for the provision of other services of for another reason, the payment or that part of the payment would not be in breach of section 56 of LASPO.

• 21.

  Example: a group of SRA regulated firms get together to advertise their services. They set up a separate not for profit company, which is wholly owned by the regulated firms/persons, to carry out the advertising under the flag "Midlands Law". Enquiries are made to a call centre, details of potential clients are passed to member firms on a rota basis and each firm pays an equal share of the costs of advertising and operating the scheme.

• 22.

  This is unlikely to involve an unlawful referral fee. On the other hand, if the advertising/marketing was carried out by a commercial entity and the fees paid by the regulated firms depended on the number of clients referred rather than the cost of the advertising/marketing campaign, this would suggest that the payment was for the referral.

• 23.

  If it appears to us that a payment may have been made for a referral or for making an arrangement, we will treat that as a prohibited referral fee for the purposes of LASPO, unless the regulated person can show that the payment was made for services or for another reason and not as a referral fee. Where you advertise jointly and pay only for that service, you are unlikely to breach the provisions of LASPO - however, you will need to be satisfied that the arrangement does not contain a referral fee element.

• 24.

  Example: A claims management company (CMC) advertises in local newspapers in its own name and has a panel of firms to which they refer cases. When a potential client contacts the CMC, the CMC takes brief details and asks a standard set of questions to ensure the claim is not time barred. The client is told that a solicitor will contact them within the next 24 hours. Firms pay a fixed fee in respect of each client referred. The CMC says that the payments are for advertising, operating the call centre and vetting potential claims.

• 25.

  A firm in this situation would need to show that the payments were genuinely for the services described. In this case the vetting would appear to be minimal and it is difficult to see how the payment for advertising could be genuine as it is being paid "per client" rather than reflecting the actual cost of advertising. It is therefore likely that the payment would include a referral fee element.

• 26.

  When determining whether referral fees are being paid, we will take into account all of the circumstances but the following factors will generally indicate a prohibited referral fee:

  • payment for services which are in excess of the normal market rate for such services;
  • an arrangement where receipt of referrals is conditional upon payment;
  • payments that are made per referral or which are otherwise linked to the number of referrals;
  • evidence that a genuine service is not being provided.
   

• 27.

  Where it appears to us that a referral fee may have been paid, the onus will be on the regulated person to demonstrate that the payment was not for the referral (section 57(7)). Firms should therefore fully investigate all relevant matters before making or receiving referrals of prescribed legal business.

Effect of the ban

• 28.

  Contravening the ban on referral fees is a regulatory breach; it does not make a person guilty of a criminal offence and does not give rise to a right of action for breach of statutory duty. The SRA may require you to demonstrate how you have achieved compliance with section 56 of LASPO in order to show that you have complied with the SRA Principles and achieved the relevant outcomes in the SRA Code of Conduct.

• 29.

  A breach of LASPO does not make anything void or unenforceable. However, a contract to make or to pay for a referral or an arrangement which is in breach of section 56 of LASPO is unenforceable.

Further information

• 30.

  A flowchart (PDF 1 page, 22K) has been designed to help practitioners examine whether an arrangement is in breach.

• 31.

  Further advice on the SRA Principles and the SRA Code of Conduct can be obtained from the Ethics Helpline.

  Information about the SRA.

Part 4 - Draft Supervision and Enforcement Strategy for the ban on referral fees

About this strategy

• 1.

  This strategy sets out how we intend to monitor and enforce compliance with the ban on the payment of referral fees in personal injury cases, introduced in sections 56—60 of Legal Aid Sentencing and Punishment of Offenders Act 2012 (LASPO) which came into force on 1 April 2013. We shall refer to this as 'the ban' in this document. The strategy sets out how we will monitor arrangements for the referral of work in personal injury cases with a view to identifying and responding to evidence of practice that is inconsistent with LASPO, our Principles or the Outcomes in the SRA Code of Conduct 2011.

  Our approach set out below will apply also to referrals between regulated persons.

  As you are required to comply with the law you should carefully read for yourself the relevant sections of LASPO.

• 2.

  This strategy is subject to our overarching enforcement strategy which sets out our approach to ensuring a credible deterrence for those who deliberately breach our rules or who refuse to engage with us constructively.

Background

• 3.

  The main focus of our action is protection of the consumer as well as the wider public interest in ensuring that by complying with the law, confidence in those who deliver legal services, is maintained. One of the objectives of outcomes-focused regulation is to enable the regulated community to take responsibility for their own compliance with legal and regulatory requirements. This allows the SRA and the regulated community to have a constructive relationship which encourages compliance and leads to changes in behaviour where appropriate You will therefore, have to satisfy yourself that any arrangements you have are not only compliant with the law and the outcomes set out in Chapter 6 and 9 of the SRA Code of Conduct but also with the overriding principles such as acting with integrity, not allowing your independence to be compromised and acting in your client’s best interests.

• 4.

  As a risk-based regulator, the SRA focuses on the risks to consumers and the regulatory objectives posed by:

  • activities undertaken by firms and individuals;
  • the areas of law in which they practice; and
  • the business model of the firm.

  Firms who have in place arrangements for the referral of work in personal injury cases may pose a risk to the regulatory objectives, specifically:

  • the promotion and improvement of access to justice;
  • the protection and promotion of the interests of the consumer;
  • the protection and promotion of the public interest;
  • encouraging an independent, strong, diverse and effective legal profession; and
  • the promotion and maintenance of adherence to the professional principles.
   

• 5.

  The SRA Handbook sets out the 10 core overriding principles which must be adhered to by all those we regulate, together a number of mandatory outcomes in the SRA Code of Conduct 2011. The outcomes set out in Chapter 6 and 9 of the Code will apply to all referral arrangements. The most relevant principles are:

SRA Principles

• 1. uphold the rule of law and the proper administration of justice;
• 2. act with integrity;
• 3. not allow your independence to be compromised;
• 4. act in the best interests of each client;
• 5. ...
• 6. behave in a way that maintains the trust the public places in you and in the provision of legal services;
• 7. comply with your legal and regulatory obligations and deal with your regulators and ombudsmen in an open, timely and cooperative manner;
• 8. run your business or carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles;
• 9. ...
• 10. ...

SRA Code of Conduct 2011

Chapter 6 - Your client and introductions to third parties

Outcomes

You must achieve these outcomes:

• O(6.1) whenever you recommend that a client uses a particular person or business, your recommendation is in the best interests of the client and does not compromise your independence;
• O(6.2) clients are fully informed of any financial or other interest which you have in referring the client to another person or business;
• O(6.3) if a client is likely to need advice on investments, such as life insurance with an investment element or pension policies, you refer them only to an independent intermediary.

Personal injury cases

• O(6.4) you are not paid a prohibited referral fee.

Chapter 9 - Fee sharing and referrals

Outcomes

You must achieve these outcomes:

• 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.

Personal injury cases

• O(9.8) you do not pay a prohibited referral fee.

• 6.

  The mandatory outcomes are supported by a number of indicative behaviours that set out the types of behaviours which are likely to demonstrate whether or not the outcomes have been achieved. Failing to achieve these outcomes may also be regarded as breach of the SRA Principles. A definition of 'prohibited referral fee' and 'paid' are included in the SRA Handbook Glossary.

• 7.

  In addition, because this is a new and potentially complex area, we have issued separate guidance which sets out our interpretation of the relevant sections of the LASPO as well as some scenarios which should be of assistance when considering if a particular type of arrangement contravenes our rules. The guidance, which will be periodically reviewed and updated as our understanding of the nature of the types of arrangements develops, can be found here.

Supervision/Monitoring

• 8.

  The ban will inevitably bring with it issues which pose a risk to the regulatory objectives. We have identified issues which will need to be considered by firms/individuals:

  • financial stability - it is envisaged that the reduction in the Claims Management Companies (CMC) industry in personal injury work will result in the loss of client leads which firms previously sourced from referrers. Firms who derive a significant proportion of their turnover from personal injury and with a high proportion of referred business will be affected heavily by the ban. Firms will need to consider whether their financial stability is at risk and what systems and controls need to be in place to continually monitor their financial stability.
  • integrity/independence - arrangements which are financially valuable may compromise a firm's integrity, professional judgement and/or independence.
  • undesirable business models - it is envisaged that firms will look to reconfigure their business model and/or apply to become an ABS. Firms currently regulated by the SRA are required to notify us of the proposed changes to their structure and all ABS applications will be assessed on a case by case basis. Where the SRA considers that changes to a business and/or proposals to become an ABS are undesirable, authorisation will not be granted.
  • In all circumstances, firms will need to determine that they are complying with the Principles and achieving the Outcomes.
   

• 9.

  Firms with arrangements in place for the referral of personal injury work will need to consider what impact LASPO has had on their business and any associated risks. Firms will need to have in place appropriate systems to mitigate any risks and ensure compliance with the SRA's regulatory provisions.

• 10.

  As a risk-based regulator with limited resources we target our action at those who present the highest risk to consumers, the public and the regulatory objectives.

• 11.

  For example, in higher risk areas where issues of concern are disclosed we may:

  • use our formal investigatory or regulatory powers; including requests for documentation and attendance of individuals at formal interview;
  • working alongside other approved regulators with a view to sharing information and concerns and identifying firms which look to contravene LASPO/our regulatory provisions;
  • use our full range of supervisory approaches.

  In lower risk areas, we are likely to use tools such as for monitoring compliance, such as questionnaires designed to enable firms to assess whether their arrangements comply with LAPSO and our regulatory requirements. Firms may be required to submit confirmation of their assessment to us.

• 12.

  These tools will be used in a proportionate, consistent and targeted manner and action may be taken in conjunction with or referred to another regulator where necessary.

Enforcement

• 13.

  Our overriding enforcement strategy makes it clear that not all breaches will require enforcement action and sets out factors that we will consider on a case by case basis when deciding if action is required. We will look at the substance of an arrangement rather than just its form and focus on those arrangements which pose a real risk to the public interest.

• 14.

  Our action will be fair, targeted, proportionate and transparent. We have a wide range of tools available to us where firms/individuals materially breach our rules and/or when they fail to engage with us. Decision making criteria in respect of each has been published.

• 15.

  These include:

  • findings but no action;
  • rebukes
  • fines of up to £2000 for law firms or up to £250m for ABS;
  • conditions on a certificate or a license;
  • revocation of authorisation or license;
  • referral of the individual or entity to the SDT which has the power to issue an unlimited fine or suspend or strike from the roll;
  • Intervention;
  • and in most cases a direction to pay our costs of the investigation.
   
• 16.

  The regulatory outcome will depend upon the seriousness of the misconduct, which will include whether harm has been caused.

• 17.

  The following factors are indicative of more serious misconduct:

  • significant detriment to the interests of the client;
  • a failure to take steps to assess whether payments made in respect of a referral arrangement are prohibited by LASPO;
  • a failure to remedy the breach once identified;
  • the passing of unnecessary costs, such as artificially inflated charges or referral fees, to clients or third parties such as defendants;
  • repeated contraventions of the ban;
  • taking steps to disguise or hide payments in an attempt to pay or receive referral fees contrary to LASPO, which may be evidence of dishonesty;
  • an intentional or reckless contravention of the provisions set out in LASPO.
   
• 18.

  Our aim in taking enforcement action will be to deter those who have breached the Principles and failed to achieve the Outcomes and from doing so again and to deter others in the same position. For the most serious of cases where firms or individuals are deliberately flouting our requirements and therefore the law, we may consider removal from practice.

  All decisions made may be published in line with our publication policy.