Are referral fees legal in business?

The referral fee debate

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The Governments ban on referral fees within the legal industry have so far only covered certain areas of law and not yet extended to conveyancing.

Sir Rupert Jackson commenting on referral fees in personal injury claims sternly stated “it is offensive and wrong in principle for personal injury claimants to be treated as a commodity”. Whilst personal injury is a different area than conveyancing, the principle must remain the same. Buying and selling a house is often the single biggest financial investment any person will ever make. Why should the agent be permitted to treat the (often susceptible) client as a mere commodity? The agent makes a financial gain while the client and all parties in the property chain are subjected to unnecessary delays and stress.

On a regular basis we are finding the payment of referral fees directly contribute a lower level of service in residential conveyancing transactions. Many of the law firms which pay referral fees are considered ‘factory firms’ and are often hundreds of miles away from the property and clients. They are known as ‘factories’ due to the approach of high volume, low fees. For this business model to work, overheads need to be reduced by the firm and a big saving is achieved through hiring unqualified staff to handle the conveyancing files. One qualified property lawyer may oversee 10 unqualified ‘file-handlers’. The high volume of files required to sustain this model are purchased from estate agents: fees (sometimes in excess of £200) are paid by the conveyancing firm to the agent in return for them convincing the buyer and/or seller to use the firm. The combination of overworked and underqualified staff more often than not results in the transaction taking considerably longer than it should.

More property buyers and sellers are realising the only reason the agent has recommended a certain lawyer is for their own financial benefit, not to ensure the client goes to firm that will handle the conveyancing with the requisite level of skill and experience.

On many occasions we are informed by clients that the agent has told them the transaction may not proceed unless they use the agents recommended lawyer. Even more alarmingly, the concept of referral fees is becoming the norm within the industry. Agents are becoming less and less willing to recommend a firm who will not pay them for the recommendation. This is a very slippery slope which only the government can address.

Although the government has promised to look into the issue of referral fees within conveyancing, nothing has been addressed to date. There is a lot of noise at the moment around the conveyancing process, rising ground rents, leasehold houses etc. These are all important and positive moves; however, they do nothing to address the decline in the level of conveyancing services. There is undoubtably a correlation between the payment of referral fees and poor levels of service because the motivation for recommending a conveyancer is misplaced. The one simple move of banning referral fees will ensure conveyancers are recommended only for their quality of service. If a conveyancing firm cannot attract clients other than by ‘purchasing’ them, perhaps they need to address how they provide their services.

When looking for a property lawyer, search the web, speak to a friend for recommendation and read the reviews of the solicitors rather than relying on an agent who is looking to make some money by passing you to a firm. Do not be afraid to ask the agent if they receive any from of payment from the firm they have recommended, it may reveal whether they have your genuine best interest at heart.

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