Latest on future of referral fees including possible ban – announcement expected shortly

Industry regulator the National Trading Standards Estate and Letting Agency Team (NTSELAT) has been monitoring agents’ compliance with their guidance on disclosure of referral fees over the last 12 months.

Together with The Property Ombudsman it has also recently asked agents to participate in a survey to assess agents’ awareness and uptake of referral fee guidance rules.

My view is that NTSELAT will have had real problems in monitoring compliance, because agents are split into three camps –

  • Those who refer customers on to third parties and receive referral fees
  • Those who refer customers on to third parties and don’t receive referral fees
  • Those who don’t refer customers on to third parties

There is no way of easily establishing which camp an agent is in, and so it would be interesting to see the results and conclusions.

We had expected a government announcement this week on the future of these fees, but it appears it will not happen as ministers have asked to see the report and consider it. Apparently, an announcement is to be made in the next few weeks.

There appear to be a couple of options for ministers to consider.

The first will be to keep the status quo and use existing legislation to manage compliance.

The legislation is the Consumer Protection from Unfair Trading Regulations and any practice by an estate agent or letting agent that hides the real price of a service can be seen as an unfair commercial practice under the Regulations.

The interpretation here is this. If the agent refers a consumer on to a third party and they receive a payment for the referral, which is not disclosed, the consumer is hit with that ‘hidden’ referral cost. This failure to disclose all the material information relating to the cost of the service means an offence is committed.

In certain cases, this is quite correct. However, many service providers charge the same fees to consumers who contract with them as a result of an agent’s referral, as they do to those who contract with them directly.

The referral fee is simply an additional cost to the supplier, not to the consumer. In certain cases, the agent has negotiated a lower fee with the supplier so that their referred customers pay less than those approaching the supplier direct.

To prove an offence, Trading Standards officers must not only prove that there was a referral fee paid in each individual case, but will also have to prove that there was a hidden cost. This might well be quite difficult.

The second option that has been mooted is the banning of referral fees altogether.

Twelve months ago this was the threat made by the Government, if agents did not follow the guidance on disclosure.

As a compliance consultant, I suspect this might well be the Government’s preferred option, given their legislative approach with agents in recent times. I think this is the worst option for everyone.

Referrals will still take place, as the good agents will want to assist customers in the buying and selling process, but there will be less incentive for them to do it, or to negotiate those good referral deals.

Service suppliers will lose business, because of the lack of any incentive for agents to refer customers on. Unscrupulous agents and service providers may well continue the banned practice and enforcement will be even more difficult.

Trading Standards will struggle to prove that a banned referral fee was paid in any individual case, because the payments will be disguised as something else. The practice will become well and truly hidden if this takes place.

  • David Beaumont is a compliance expert specialising in the agency sector. He runs Compliance Matters and can be reached on 0161 727 0798. www.compliance-matters.co.uk
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13 Comments

  1. #ImpressiveConveyancing

    2 points:

    1. Agents are in fact split into FOUR camps – as the first one mentioned above has to be split into 2

    Those who refer customers on to third parties and receive referral fees AND Don’t care about the quality of the conveyancing service the public will receive as the payments they receive total a massive amount and that is too tepting
    Those who refer customers on to third parties and receive referral fees AND do care about the quality of the conveyancing service the public will receive
    Those who refer customers on to third parties and don’t receive referral fees
    Those who don’t refer customers on to third parties

    2. The Government won’t be able to ban referral fees – too much money is being made at the expense of the public (camp 1 above) that won’t be allowed to be threatened. You can only ban referral fees if you (1) stop an estate agent owning a conveyancer (2) ban the conveyancer from making ANY oayment to an estate agent (commssion or otherwise) as indirect payments will be the work-around (3) ban a conveyancer from paying an introducer (non-estate agent) panel manager etc.

    A ban cannot work. Sadly for the public.

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  2. RussellQ

    There’s a further aspect to this that probably hasn’t been considered by the authorities – that of businesses such as Countrywide, LSL and Foxtons whom pass leads to their own, separate conveyancing and mortgage entities and, whilst they do not pay referral fees back to the referring branch, still profit purely from referrals but that are in effect still internal.

    However, the fact that they do not technically pay a referral fee but simply have a separate P&L for such income, means that CWD, LSL and Foxtons will be unfairly advantaged versus smaller independents.

    I’d envisage the answer being that all other agents will simply set up separate limited companies that are paid a ‘marketing levy’ – or some will just set up their own conveyancers and mortgage brokerages that yield an independent profit which is then separately distributed back to its shareholders.

    In any case, banning referral fees rather than enforcing their fairness and transparency, is another hammer to crack a nut from a Government that continues to put electoral populism over pragmatism.

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    1. LetItGo

      We refer £1k’s of work to plumbers, handymen and maintenance trades in general. They pay me a referral fee and why not? For them to receive the £1k’s of work we pass to them they would have to spend the equivalent referral fee on advertising. I spend a considerable amount (well in excess of the referral fees) on monthly advertising -they spend nothing.

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      1. The Hero

        LetItGo, I suppose it depends on whether the tradesman then up their prices to cover the referral fee, thus charging the customer more than they would otherwise have paid. If they don’t and they see it as an operational cost that doesn’t impact the customer then there isn’t an issue in my opinion, but if they could have got the work cheaper by going direct there potentially is.

        For me, that’s the biggest area that needs attention; I don’t think a ban is in anyone’s interest but it isn’t great for consumers if a friendly referral actually ends up with them paying more for a service they could have got cheaper by going direct.

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        1. LetItGo

          Perhaps its time that clients paid the tue cost of rental mangement. With the contiually increasing legislation then someone has to pay, if its not through referral fees then it will be through managemnt fee which will translate to higher rents….when with the government learn?
           

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          1. CoMa_MB

            The true cost of any product is what someone is willing to pay for it.

            If you don’t want it you wont pay for it.

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  3. Thomas Flowers

    ‘Conditional’ selling of a conveyancing product wrapped up as an agency fee deferment option by some call centre brands is by far the biggest problem.

    Does this also potentially breach the Estate Agency Act as the LPE’s selling the service know the provider is woeful and likely to cause many customers extreme heartache from poor service delivery?

    The good news….. is an outright ban likely to destroy the call centre agents businesses or will they find a cunning way around this?

    What if these call centre agents bought their conveyancing companies and incorporated their fees within their turnover?

     

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  4. Property Pundit

    Concerning times ahead for those agents and portals who rely heavily on third party revenue.

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  5. jeremy1960

    Since the tenant fee ban act, letting agents have been inundated on a daily basis by companies with all sorts of schemes to “replace lost income” companies offering broadband deals, utility deals deposit free options and so on. Many of these offers will, I have no doubt, turn out to be a future issue as was PPI.

    The legislation is currently in place stating that all fees must be declared to the Principal (landlord/vendor). What needs to happen is that this legislation be enforced rather than banning something and then spending years trying to track down all the threads that have replaced it. If there is insufficient enforcement now, the future will be akin to trying to herd cats!

    We have been there before with the tenant fee ban, why again???

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  6. Sensible.

    Gotta laugh at agents scrambling to defend this grubby practice.

    The public should not have to pay double a fee to pay for a referral, nor, half the fee to the awful conveyancing firm who pays the other half back thus employing monkeys and doing twice or three times as much work.

    How can an agent honestly claim an honest referral to a factory in another part of the country to an unqualified person who they have no idea who it will be. It’s laughable. Id be embarrassed. I’d rather earn my money honestly.

    There is no justification for it, no matter how hard you try and convince yourselves.

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  7. lukealberte

    The referral fee is simply an additional cost to the supplier, not to the consumer. In certain cases, the agent has negotiated a lower fee with the supplier so that their referred customers pay less than those approaching the supplier direct.

    https://slitherio.online/

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  8. Alan Murray

    Unfortunately whilst referral fees should clearly be banned, as with most of the ills in conveyancing today this is something that has been allowed to go beyond the point already where it can be realistically stopped. It is a long time since customer service and client care were considered by a huge majority of people working in the sector, since it became obvious too the predators out there the money that was available to be made. In the name of GREED conveyancing and in particular the Law Society, lost control a long time ago.

    There is big money in referral fees. As we know there are even companies out there who do nothing other than act as middlemen buying and selling leads, making money for all and adding fees on to the consumer who doesn’t even know what he is signing up for most of the time. It would be nice to think those companies at least could be shut down, they are nothing more than the Emperor’s New Clothes dressed up as Legal people. I was working at a firm of Solicitors recently who were dealing with this company. In some cases where they were acting in a sale and purchase they were paying a four figure sum to the middlemen. All passed on to the clients who could have paid a more reasonable fee going direct to the Solicitor. I would love someone to justify that arrangement to me in the name of customer service? Can Trading Standards not act to stop what is nothing more than legalised theft?

    Let alone that the clients have no idea what they sign up for and ring the Solicitors completely confused and spend hours on the telephone having the relationship explained. Makes no sense to me but then again I am old fashioned, I believe in doing the best possible job and giving the best possible standard of customer care. Unfortunately in these dark days that is a radical way to approach conveyancing.

    Thank goodness I retire soon.

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  9. phil@4cornersproperty.co.uk

    Oh boy this is a hard one to swallow on so many levels.

    1. Every business has a cost of marketing, if they see referral fee’s as a 100% success rate option and it comes out of their fee’s then that should be fine.

    2. If however the referral fee is to be determined by the referrer as to ‘how much can i get away with?’ then this is absurd and should be banned.

    3. I know of a well known brand that earns more from referral fee’s to solicitors per client than they do the sale fee, now that shocking.

    Unfortunately I can see this happening, i have said it several times and it will be the selfish idiots who dont care about service that will be the cause, and downfall, of their own greed.

    If everyone played by sensible rules, maybe a cap at £150 referral fee then we wouldn’t be seeing this. But then I received an advert from Estate Agent Today with the headline “Grow your referral fee numbers”  were they offer up to £300 referral fee.. WTF..

    Buckle up princess, i sense a storm coming.

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