Cap on legal referral fees must be enforced

Posted May 10, 2017
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The long awaited end to excessive lawyer referral fees might finally be here.

This in the wake of the decision last week by the Law Society of Ontario to cap referral fees paid to referring lawyers and paralegals for referral arrangements entered into on or after Thursday, April 27, 2017.

The proposed cap on referral fees would be 15% for the first $50,000 generated in legal fees and 5% thereafter, with a total referral fee cap of $25,000.

Now, lawyers referring work to other colleagues, such as personal injury lawyers, will be forced to focus only on who will help the client the best, rather than who will pay the highest referral fee.

Included in the new rules are transparency provisions designed to expressly inform the client of the specifics of the referral fee arrangement.

While client consent was always a requirement when referral fees were paid, clients were often kept in the dark on the scope of these arrangements, perhaps because referral fees were paid out of the lawyer’s fees as opposed to out of their compensation.

From now on, clients are to be included in this discussion so they can understand why a referral fee is being paid and can make sure they are content with it under the circumstances.

Given that many lawyers have been marketing referral fees at amounts and percentages grossly in excess of the proposed cap, it’s anticipated the cap will become the “going rate” that lawyers will pay for referrals.

That said, whether the referral fee cap will actually deliver on its promise to better protect a client’s interests in obtaining quality legal representation will depend entirely on how the Law Society enforces the cap.

For the cap to be effective and meet its objectives, it is absolutely vital that the Law Society aggressively punish any conduct that violates the spirit of the cap.

Effective implementation of the referral fee cap will be a challenge as innovative lawyers will look for “legitimate” loopholes.

It is crucial that the Law Society is not only armed with extensive powers to scrutinize conduct aimed at compensating a referring lawyer at amounts above the cap, but to harshly punish all violations.

Some of those anticipated loopholes will include:

Using co-counsel arrangements as a facade to split fees with referral sources.

Charging unrelated marketing type fees between referring law firms.

Paying the referring lawyer for his or her time to date, above the referral fee.

Sending enhanced holiday and other gifts.

For the cap to work, lawyers must not fear that others will be allowed to improperly skirt the cap to their financial peril.

But if implemented correctly, the cap should serve to encourage those within the legal industry to direct clients to those best suited to help them.

See original article as it appeared in the Toronto Sun on Tuesday, May 9, 2017: Cap on legal referral fees must be enforced

Darcy Merkur is a partner at Thomson Rogers in Toronto practising plaintiff’s personal injury litigation, including plaintiff’s motor vehicle litigation.

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