The Legal Services Consumer Panel has called for action to tackle problems surrounding referral fees, but stressed that such fees ought to be retained if its proposals are implemented. The panel has called for more disclosure of fees paid and better regulation following its own review of the current system.

The panel’s report for the Legal Services Board, based on a study carried out by market researchers Vanilla Research, follows economic analysis for the LSB published last week by consultants Charles River Associates. That analysis said there was no evidence that such fees caused consumer detriment in either the conveyancing or personal injury markets.

The panel’s report revealed the large sums of money that change hands between lawyers and introducers.

Conveyancers pay fees of up to £300 an instruction to estate agents, while claims management companies typically receive referral fees of £800 from a lawyer in respect of a client injured in a road traffic accident. Adding the costs of medical experts, car hire companies and others, the total commission paid in a single case can reach £1,500.

The panel called for action to tackle a number of problems, including: the issue of closed bids and auctions, that mean work is referred to the lawyers paying the highest referral fees rather than the best lawyers; pressure-selling tactics by estate agents and insurers to get clients to accept the lawyers they recommend; high levels of non-compliance with transparency rules by conveyancers and estate agents; and competition concerns raised by the trend for introducers to refer work to a small number of large law firms.

However, despite these concerns the panel said evidence suggests referral fees do not increase the prices paid by consumers for legal services or reduce the quality of work.

The panel’s report cited Charles River’s finding that conveyancing prices are on average nearly £150 cheaper among firms paying referral fees compared with those that do not - £543 compared with £687.

It found satisfaction rates with lawyers were high – around 90% - regardless of whether referral fees were involved, and the panel said they found no evidence of lawyers providing biased advice in order not to lose work from introducers.

The panel made 12 recommendations to address its concerns. It called for the current ‘hotchpotch’ of rules to be replaced with a consistent set of regulatory arrangements for lawyers and introducers; improved transparency requirements including the idea of consumers giving written consent to be referred for a fee; and ‘mystery shopping’ and other enforcement action to tackle breaches of transparency rules.

Panel chair Dr Dianne Hayter said: ‘Consumers are surprised, even shocked, that lawyers pay referral fees, but they are willing to tolerate this so long as transactions are conducted in the open. Greater transparency combined with tough action against rule-breakers is needed to ensure that referral fees work in the interests of consumers.’

She added: ‘Referral fees have their problems, but they can increase access to justice while not raising prices or reducing the quality of advice. So long as the issues identified in the panel’s report are successfully tackled, referral fees have their place in the legal services market.’