1.1. Who should read this Guidance Statement?
This Guidance Statement is for solicitors and law practices.
1.2. What is the issue?
This Guidance Statement identifies the ethical and other issues to consider where a solicitor proposes to pay or give a financial benefit to a third party for the referral of a client to the solicitor.
A solicitor should not permit a solicitor’s personal interests to conflict with the obligation to act in the best interests of clients in matters in which the solicitor represents those clients (see Rule 12.1 of the Australian Solicitors Conduct Rules 2012 (ASCR)). Other relevant fundamental duties include those a solicitor owes to the administration of justice (Rule 3 ASCR), to act in the best interests of the client (Rule 4.1.1 ASCR) and to avoid any compromise to their integrity and professional independence (Rule 4.1.4 ASCR).
1.3. Status of this Guidance Statement
This Guidance Statement is issued by the Queensland Law Society (QLS) Ethics and Practice Centre for the use and benefit of solicitors.
This Guidance Statement does not have any legislative or statutory effect. By having regard to the content of the note and following the guidance it may be easier for you to account for your actions if a complaint is later made to the Legal Services Commission.
This Guidance Statement is not legal advice, nor will it necessarily provide a defence to complaints of unsatisfactory professional conduct or professional misconduct.
This Guidance Statement is endorsed by the QLS Ethics Committee as representing a standard of good practice.
2. Ethical principles
2.1. Rule 12.1 Australian Solicitors Conduct Rules
The effect of Rule 12.1 is that when a solicitor wishes to act for a client who has been referred by a third party, a solicitor cannot offer to give or give a financial benefit for the referral unless the solicitor satisfies Rule 12.4.4, and the applicable statutory provisions do not prohibit the offering or giving of the financial benefit.
Where a solicitor does look for work by offering to pay or give a financial benefit to a third party (be it a referral service, another solicitor or a business person such as a real estate agent), the solicitor must consider whether such an arrangement could lead to a conflict between the loyalty owed to the client, any obligation owed to the referrer and the self-interest in receiving further such referrals.
A solicitor should consider each of the following before entering into a client engagement in these circumstances:
- Is my independence compromised by the referral arrangement?
- Have I explained the referral arrangement (including the financial benefit) to the client?
- Has the third party who introduced the client to me also disclosed this information to the client?
- Am I otherwise being open with my client as to the financial benefit?
- Am I aware how the referrer obtained the client?
- Is the agreement between the referrer and the client fair and in the client’s best interests?
- Will I be able to advise my client free of any bias caused by my relationship with the referrer?
- Will I be free to advise my client without fear of offending the referrer and risking further work referrals?
- Is the nature of the payment as a referral fee simply and transparently disclosed to the client?
If the answer to question 1 is “yes” and to any of the other questions is “no” then the solicitor may be in breach of fiduciary duties and ethical responsibilities. A breach of fiduciary duties could result in an order for monetary compensation to the client. A breach of an ethical duty could see the solicitor exposed to disciplinary action.
If no disclosure is made, the payment may even be seen as a secret commission, which could lead to criminal sanction, in addition to any civil or disciplinary consequences.
2.2. Statutory prohibition
Queensland legislation prohibits any person (including a solicitor) from giving or receiving consideration for a claim referral or potential claim referral and approaching or contacting a person and soliciting them to make a claim for personal injuries. Criminal penalties apply.1
2.3. Rule 12.4.4 in context
Rule 12.4.4 ASCR permits a solicitor to act for a client in any dealing in which a financial benefit may be payable to a third party for referring the client to the solicitor provided that the solicitor first discloses the payment or financial benefit to the client. The solicitor must satisfy not only the rule but also the solicitor’s fiduciary obligations.
On the one hand, unlike Rule 12.4.3 ASCR (which is concerned with receiving a referral fee and is the subject of a separate Guidance Statement – see More Information below), Rule 12.4.4 does not expressly require that the client’s informed consent be obtained and only refers to disclosure of the financial benefit to the client.
However on the other hand, the solicitor must also take into account the proscriptive nature of the solicitor’s duty of loyalty to his or her client. As a fiduciary, a solicitor cannot act inconsistently with the interests of the client – that is, the solicitor cannot permit a conflict between the solicitor’s own interest and the interests of the client to arise. This “no conflict duty” prohibits a solicitor placing himself or herself in a position involving a real and sensible possibility of a conflict, unless the client provides “informed consent”.
Informed consent therefore – and independently of the strict wording of Rule 12.4.4 – requires “full disclosure” of the prospective conflict. More is said below about obtaining informed consent.
The better view is therefore that despite the difference in wording of Rules 12.4.3 and 12.4.4, there is a positive duty to disclose fully the fact and nature of any possible conflict of interest arising as a result of a referral fee under both Rule 12.4.3 and Rule 12.4.4.
2.4. Informed consent
Informed consent requires that there be “full and frank disclosure to the client of all information known to the solicitor which the client should know”.
It is recommended that the following matters relating to the terms of the referral should be raised with the client before the retainer is entered into:
- That a financial benefit will be given for the referral;
- The amount or monetary value of the financial benefit to be given or, if the amount or monetary value is not known, the formula or other method by which it will be calculated;
- The nature of the financial benefit to be given (e.g. cross-referral of other business, discounted payments or rebate, success fees or even a shareholding or financial interest in the third party);
- The terms and nature of the referral arrangement; and
- That the client may refuse to enter into the retainer.
It is also recommended that the following should be explained to the client before the retainer is entered into:
- That the financial benefit will not be recovered from the client;
- To whom the financial benefit will be given and for what services;
- That the referrer will not influence the nature, style and extent of the representation;
- That client confidences will be preserved, or if applicable, the extent to which confidential information may be disclosed to the referrer; and
- What will happen if a conflict arises during the representation; for example, the need to terminate the engagement due to the conflict and the additional costs a client may incur from such termination.
The disclosure and consent should be evidenced in writing prior to accepting instructions or being retained by the client. On many occasions, it will be necessary for the solicitor to advise the client to obtain independent advice.
In addition to the ethical issues associated with referral fees, a solicitor needs to consider his or her professional indemnity insurance and whether the referral arrangement may engage an exclusion.
3. More Information
Solicitors are referred to The Australian Solicitors Conduct Rules 2012 in Practice: a Commentary for Australian Legal Practitioners, Queensland Law Society, June 2014.
For further assistance please contact an Ethics Solicitor in the QLS Ethics and Practice Centre on 07 3842 5843 or email@example.com
1 Personal Injuries Proceedings Act 2002 (Qld), s 71; Workers’ Compensation and Rehabilitation Act 2003 (Qld), s 325; Motor Accident Insurance Act 1994 (Qld), Part 5AA.