Lawyers who pay estate agents referral fees do so only because they can’t win the business on their own merit.
That’s the claim from a legal expert who has renewed the call for a ban on the practice.
David Knapp, from law firm Hart Brown, warned that the payment of referral fees raised ethical issues.
He said: “As the agents do not have the same restrictions as solicitors in acting for either side of a transaction they can also refer the other parties in that transaction and so if they are involved with more than one property in the chain earn a number of referral fees. A good little earner.
“My view on this type of arrangement is that lawyers who need to pay referral fees do so due to their inability to obtain business on a meritocracy basis.”
He said that other ethical issues that arose because of the practice included: uncertainty over who “owns” the client; agents putting “huge” pressure on clients to use solicitors with whom they have a referral fee arrangement; and a potential lack of clarity over whether or not a referral fee is being paid.
On the April 1, 2013, the Solicitors Regulation Authority banned referral fees in all personal injury cases.
Hart argued that this should have gone further.
He said: “As an experienced lawyer, I am extremely frustrated at the referral fee ban not extending to all areas of law.
“I am pretty certain that if a poll was taken of all solicitors as to whether referral fees should be outlawed in conveyancing, there would be an overwhelming majority in favour of a ban.”
Knapp’s comments come on the back of NAEA Propertymark’s response to a Government call for evidence into house buying and selling which closed in late December.
In its response, NAEA Propertymark argued that the Government should take further action to enforce current transparency regulations regarding disclosure of referral fees.
It said: “Referral fees must be fully disclosed to the buyer and the vendor to ensure that any fee and commission the agent will earn is quantified.
“The information should be explained clearly in the sales particulars, when the sale is arranged and outlined on the agent’s website.
“To this end, we have long called for the guidance to help agents comply with the Consumer Protection from Unfair Trading Regulations 2008 and the Business Protection from Misleading Marketing Regulations 2008 to be presented in a way that consumers will find easier to understand.
“We also believe that the guidance should go further in including specific examples which will help agents to understand what they should and should not say when dealing with consumers.
“A standard form could also be produced for the industry which must be signed at instruction and evidenced throughout the buying and selling process.”
Not a great fan of referral fees but don’t totally agree. Many moons ago a local agent sent me all of his available conveyancing work because I worked 24/7 (almost) and provided a first class service. He sold the business. New owner demanded a referral fee or no work. I said “no way Jose”. He pulled all of the work except for him, his family and friends. Speaks volumes?
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Good for you although your experience highlights the power of the agents in pressurising lawyers to pay referral fees. One imagines that some, if not all, the staff in the local agent’s office in question remained employed, people with whom you had a very good working relationship, such relationship dashed at a stroke on the premise of an income stream. Very possibly this may have not benefitted the public due to the location of the lawyers who paid the fee and, maybe, the quality of the work carried out on their behalf. The telling aspect is, as you say, the work carried out by you subsequent to the change as your quality of work was clearly appreciated and acknowledged.
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I agree with both of you in many ways. There is no doubt that referral fees are very similar to tenants fees. They are a cash cow only producing any real benefit to the poor lawyers and estate agents. It is time ALL referral fees should be banned.
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Ahh, a standard form. That is what i want to see on a Tuesday morning, more paperwork and legislation for us to comply with. Correct me if i am wrong, but as far as i was aware, the law already stated that we had to disclose to a vendor or purchaser that we got paid a fee for recommending them to a solicitor. This i do everytime and have no issues with it. I also disclose when i am recommending a solicitor to the other side of the sale and both sides take comfort in the fact both are using local solicitors.
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Indeed the legislation does require discosure. Unfortunately the request by the NAEA Propertymark referred to above “…….that the government should take further action to enforce current transparency regulations regarding disclosure of referral fees” is evidence itself that not everyone is following the regulations to the letter. The 4 paragraphs in the article above that follow the requestby NAEA would not have been necessary had there been full compliance by all. One can only assume that some agents hide the disclosure in the very small print so making it difficult to find. Maybe some do not disclose the subject at all.
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SOME lawyers.
Referral fees can, and do, mask mediocrity, especially for some volume conveyancing outfits who would go bust over night if certain brand name chain estate agents were not paid eye wateringly high amounts of money to herd their customers (both buyer and seller) to mediocre conveyancers. It is why you will find the same names appearing on a conveyancer’s top 5 list of mediocre conveyancing firms. How do you think they continue trading. They amy claim it is all singing IT, and staffing, but sadly, none of that produces good legal work. It’s referral fees/buying the public.
But do not forget, that:
1. referral fees can allow conveyancers to enter new geographical locations
2. referral fees can be far more effective that an advert in the newspaper
But the REAL problem is, estate agents are under massive competition, and money is tighter, and if conveyancers are willing to pay a cash amount for a conveyancing lead then the arrangement flourishes. Conveyancers have little they can give back to an estate agent, except impressive conveyancing.
Now, you would think that working with the very best conveyancers would be the attraction, as it is great PR especially in the current world of social media reviews, BUT not for some estate agents, who just want the cash. Others will say they want great conveyancers only, and no money, and others will say they want both, great conveyancers and if conveyancers are also willing to pay cash, great. Hard to blame the Agent in the latter.
Ban referral fees? Too many ways around them…..unless you ban the receipt by any estate agent of any remuneration from a conveyancer, or any conveyancer owning an estate agent – save the payment of a genuine commission account.
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Yes, but if all the bad conveyancers / conveyancing solicitors went bust, how would the rest cope?
20 solicitors nationwide couldn’t cope with 850k transactions,
Surely?
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Hilarious (and inaccurate) as usual Matt.
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Matt
You are absolutely right but I don’t think that would happen. The market forces at work will inspire new businesses to fill the gap!
However, there is definitely a problem with quality and this is caused in part by owners of law firms embarking on volume vanity projects. “We’re running x 100 cases – how good are we?”. I interviewed a candidate this week who works 12 hour days and weekends because her boss took the Panel Manager’s shilling. She’s leaving because she is embarrassed by the service she can’t give. Oh, and yes, she works for a tiny firm with three people doing panel work. This is not a “factory problem” – it’s a “lack of thinking vanity problem by lawyers who own poorly run firms.
(David is spot on when he talks about desperate lawyers – let’s get them to wake up and smell the coffee)
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A recommendation should be just that, not a referral for a fee
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We see a constant calls for banning referral fees and its usually from firms that wish to clear their driveways of competition. One might argue thats fine but what does annoy me is when its done under the guise of ethics.
I think David Knapp needs to do a little more investigation; for a start there are very few firms where an estate agent would receive a referral fee from both sides of the transaction. Most firms do not have separate legal practices and therefore cannot act on both sides.
Secondly he is incorrect in saying these fees are undisclosed, they are and as an estate agent I have made sure I’ve evidenced the client letters going out which actually SHOWS the referral fee. Pity David didn’t check that either.
Finally, I actually think that the payment of a disclosed referral fee is actually a little more honest than the old “I will put a few probate sales your way” or the “how about I take your team out for a Chinese meal at the end of the month.
Good solicitors will always do a better job than large conveyancing panels, so I really don’t see what you are running scared of. Its a straight forward business decision you make. Pay referral fees and earn less thereby having to act on many more transactions or accept you are going to see less referral business, charge a better fee and continue to do a better job. It is after all the same dilemma we face in the event of the cheap fee war brought on by the online agents; quality over quantity.
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i am interested to know why you believe the banning would “clear the driveways of competition”. The solicitors who provide an excellent service, charge a good level of fees and who obtain business on merit could easily start paying referral fees and very quickly eradicate the competion who do not provide such a good service. By charging higher legal fees they could offer a greater referral fee to the agent at the expense of other lawyers as their margins are greater.
As regards the suggestion that I said that the fees are undisclosed my actual words refer to ” a potential lack of clarity overwhether or not a referral fee is being paid” which is completely different. As mentioned above, the commentary from the NAEA’s stance supports the view that not all follow the directives.
Your argument that good solicitors charging a good few will do a better job and necesarily survive is a fair argument. The sad facts are that one hears of stories where clients are dissuaded by estate agents from using their usual and favoured solicitors with all types of threats just to ensure that the pet solicitor is used.
As an aside solicitors have been embroiled in cheap fee wars for decades since the scale fees for conveyancing were consigned to history.
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As I recall, when things went awry in 2008, it was the firms that had paid referral fees to estate agents who were the first to go under…..
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‘lawyers who need to pay referral fees do so due to their inability to obtain business on a meritocracy basis’
Maybe in some cases yes… however any good agent will not refer to a substandard firm, fee or not. It doesn’t benefit the agent to work alongside anyone who doesn’t provide an excellent service. We are often asked for recommendations and refer to a handful of firms who we know and trust and have a good rappor with – some pay a fee, some do not. If the monetary incentive outweighs the decision of which company to refer to then the agent is at fault not the lawyer.
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I’m afraid I can’t agree with you there. In Newcastle and Sunderland, where we operate, there are firms who receive nearly all of their work from agents for a referral fee. We all know who they are. The really annoying bit is that we, and others like us, have to do twice the amount of work to get a case to progress. This is because the firms I refer to offer the most appalling service. We have to warn our clients in advance if these firms are on the other side of a case to us. They don’t respond to letters, emails or telephone calls. We even get the agents who sent the work to them asking us what is going on, thus wasting even more of our time. The worst if it is that one of the firms is a longstanding City Centre commercial firm. Our staff once met the chief problem causer at a social, we were astounded to find that he did actually exist and he confirmed to us that he did know how to use a telephone, this confounded us all.
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Mr Knapp and Jacqueline are both spot on and when you refer to a good agent, yes I know of 2! None of them are with the big groups.
K Chalk seems sensible but admits to taking bungs from solicitors?? Mr Chalk, can you take a guess at how much a small average 2 to 3 partner firm has to pay in PII and the run off at the end? Do you know what the fees are to the SRA and cost of practicing certificates and fees for CQS. Everyone seems to be in the business of wringing every last penny out of law firms?
How much net profit do you make on a sale? 1-2% ? On a £500,000 house you are charging between 5-10 grand. Typical conveyancing fee probably around 850 to £1000 and that is for a qualified person to perform extensive work using hopefully extensive up to date knowledge to look after their client all the way.
An agent makes a damn site more than the lawyer who has all of the risk if an error is made due to being harrassed and harangued by whipped up clients and nagging agents. If it wasn’t for agents hassling everyone and calling every day and emailing then the lawyer might have time to study papers and reports and perform the tasks at hand to ensure that their clients interests come first, not your or their own.
Agents want more and more and more. It is only a matter of time before clients get wise to being taken advantage of. Solicitors can assist by communicating the situation to the client at the outset warning them of the way agents operate.
Agents (most) do not appreciate the first thing about the legal requirements of transactions, rising ground rents, overreaching, estoppel etc etc
How many agents are there out there with a land law qualification? They just want their sale so they can get their cash in their bonus period.
Funny how a large agency chain in Brighton would not recommend a small firm because they refuse to give bungs to the agent but the branch manager used the small firm for the sale and purchase of his own property.
If you read the bribery act it is difficult to see how referrals do not sit within it? Especially as most lawyers are not transparent with their clients about the bung taking place.
Some agents actually refuse to allow potential buyers view a property unless they use their preferred lawyers lenders etc.
These agents are now selling lenders and lawyers to their clients to clear and extra £600 per transaction. The firms they refer clients to or should I say force clients to use are usually a panel of 1 lawyer (probably not the best either) directing a dozen monkey’s with headsets who became tired of working in a call centre or in the returns and complaints department of one of the UK’s now defunct department store chains.
There should be a standard pre contract form where you have to state the referral and the cost of it to a client. Better still just ban the practice.
It is without doubt that some firms gain the advantage over others by chucking the agent a few hundred £, after all the agent are the greediest ******* on the planet apart from the Mangalitsa pig!
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Referring to a solicitor should not be based on their wallet, but on their performance; and I suppose the size of their wine cellar would help!
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There is nothing wrong with referral fees, its simply a cost of doing business.
Getting business direct also has a cost!….ultimately what ever model is used….there is cost!
All costs are part of a paid for service….either way there is a cost of securing any type of business.
Could the problem be the industry and stakeholders not valuing the profession…. Constantly cutting costs and doing work with minimal margins to win business creates “RISK” that is the real problem, not how sales are secured as long as proper governance is in place it makes no difference whether referal fees are paid or marketing budgets to attract direct business are paid….its all a cost.
Fees and being paid fairly for the work done and the risk taken appear to be thought of as dirty words…Profit is good! …it allows investment in staff, working processes and reduced risk!
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What a load of old nonsence you spout!
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As a solicitor I have never paid a referral fee. I do not condemn firms that do. It depends upon your market place. I recently asked a partner at a multi-officed local firm why they paid most of the agents referral fees, and he commented that in his opinion he had to, to be in the market.
Conversely, I employ 4 conveyancers and we have 85% of our work from existing clients and recommendations. Usually we take on 70-90 new matters a month. You tell me, why would I want to pay referral fees when we are at capacity and charging between £750 and £1500 per transaction. Perhaps we are just lucky or quite good at what we do.
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