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Should referral fees be regulated or prohibited?

In 2002, the Law Society of Upper Canada amended its Rules of Professional Conduct to allow lawyers to pay referral fees to other lawyers.

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The rationale was that referral fees would encourage lawyers to refer work to lawyers better able to serve a client’s interests, reducing the likelihood that the lawyer would accept a retainer to act on a matter that may be beyond his or her ability. Ultimately, it would be a “win-win-win”: the referring lawyer would receive a payment, the referee lawyer would obtain a new client, and the client would be served by a lawyer well-qualified to act

Conditions were put in place to prevent abuses. The referral had to be made because of the expertise of the referee lawyer. Referral fees could not be paid where the referral was made because of a conflict of interest. The referral fee had to be reasonable and could not increase the total fee charged to the client. The client had to be informed about the arrangement, and consent.

When the Federation of Law Societies developed its Model Code of Professional Conduct, it adopted the Ontario rule on referral fees. Today the Ontario rule is in place in all Canadian common law jurisdictions.

Over the last 15 years it has become apparent that additional conditions are necessary.

Referral fees had gradually increased to upwards of 25 per cent of the total legal fee. Fees received by referring lawyers were frequently disproportionate to the value provided. As referral fees increased lawyers became increasingly incentivized to refer cases to the highest bidder rather than to the lawyer best qualified for the case.

Concerns about referral fees came to a head in 2016 when a Toronto Star investigation publicized how a notorious personal injury firm had been attracting thousands of clients with aggressive marketing, then referring the cases to other lawyers in return for hefty referral fees. The Star revealed that the lawyer serving as the face of the law firm had never tried a case.

This year, the Law Society of Upper Canada amended the rules for referral fees: they are now capped at 15 per cent of the first $50,000 of legal fees and 5 per cent of any fees in excess of $50,000, to a total maximum of $25,000, and can be paid only if the client and both the referring and referee lawyers enter into an agreement prescribed by the Law Society that confirms, among other things, that the referring lawyer provided the contact information of at least two lawyers qualified to handle the matter, and that the client understands that he or she has no obligation to accept the referral.

The need for such stringent regulation suggests we should revisit the question: Should referral fees be permitted at all?

The harm referral fees aim to prevent is already addressed by other rules of professional conduct. Lawyers have a duty not to undertake matters they are not competent to handle. If consulted about such a matter, lawyers must decline to act. No financial incentive should be required to motivate compliance with an existing professional obligation.

Lawyers are privileged to have a self-regulating monopoly on the provision of legal services in Canada. With this privilege comes a duty to assist the public in securing competent legal services. From this perspective, it appears unreasonable for lawyers to expect payment for providing this assistance.

On the other hand, referral fees facilitate connections between clients and competent lawyers. Good lawyers are not always good marketers, and the public doesn’t necessarily know where to find legal services. Many lawyers and clients thus rely on referrals. Prohibiting payment for this valuable service may be an unwarranted interference in the market, provided such payments are reasonable and consistent with other professional obligations.

Additionally, partners in large firms are compensated for referring work to other lawyers in the firm. A prohibition on referral fees may give large firms an unfair advantage.

The practice of law is both a profession and a business. It falls to our regulatory bodies to resolve any tension between these dual roles. The Law Society of Upper Canada acted appropriately by balancing the interests involved, and recognizing that while prohibition may be an overreaction, implementing targeted safeguards was necessary to protect the public and the integrity of the profession.