ABSs established to avoid referral fee ban leave SRA powerless
Industry News : 14 June 2012
Preventing the establishment of companies who could get around the ban on referral fees has been described by regulators as something which they would be powerless to.
The Solicitors Regulation Authority (SRA) announced today that alternative business structures (ABS) encompassing both law firms and claims management companies may not fall within the scope of any ban on referral fees.
The government has stated that by April 2013, it that wants the payment and receipt of referral fees prohibited in all personal injury cases. However, a discussion paper released by the SRA today warned that a ban may not have any effect on the rising number of claims due to the fact that it is so difficult to define.
The discussion paper stated, ‘Many claims management companies may legitimately argue that they are carrying out marketing for groups of firms and that they are not caught by the ban. Such activities may be under particular scrutiny, as we will want to ensure that they are not being used to avoid the ban.
‘One of the government’s expressed aims is to reduce activities that actively encourage people to make unnecessary or spurious claims when they might not otherwise have done so. However, it is possible that the ban will not lead to this outcome because of the difficulty in definitions.’
When combating the issue of ABSs being set up to get around the ban, the SRA suggested that it could refuse a licence or impose conditions if they pose a threat to the public interest. Despite this, there is little that the SRA is able to do to prevent businesses that are not perceived to represent a threat from setting up.
‘There would be no need for referrals, and therefore no referral fees would be paid,’ the paper revealed. ‘We believe that, provided all of the requirements for authorisation are met and the ABS complies with all of its regulatory obligations, we cannot seek to prevent such arrangements simply because they are set up to avoid being caught by the ban.
‘An ABS is a legitimate form of business, supported by a strong statutory and regulatory framework.’
The paper warned that there could be a ‘steep increase in the number of financial failures’ for existing law firms who rely on business garnered from referral fees. Discussing this issue, the paper stated that, ‘Even for small firms who do not do significant amounts of this work, the potential loss of revenues could add to the cumulative effect of difficult economic conditions, difficulties in maintaining adequate levels of bank financing and the impact of loss of other revenue through the continued stagnation in the housing market.’
The Ministry of Justice and the SRA are continuing to dicuss ways in which to police the ban whilst its specifics are being finalised.
John Wooton, President of the Law Society, said, 'We are ready to work with the SRA and other interested bodies in making the ban on referral fees for personal injury cases work – the measures adopted need to be straightforward, proportionate and effective.
‘Care needs to be taken in implementation to ensure that the parliament’s intentions are achieved without unintended consequences. For instance, the ban should not prevent firms’ legitimate marketing activity.’
