Third party relationships: moral hazards and conflicts of interest

A solicitor working for a Preston firm has been struck off by the Solicitors Disciplinary Tribunal after several allegations brought against him were proved. The Solicitors Regulation Authority (SRA) brought a total of ten allegations against him, including failing to act with integrity, acting where there was a conflict of interests and acting in a manner which led to his independence and that of his firm being compromised. See here.

What issues did this case raise?

There have been a number of cases over the last 15-20 years involving solicitors who have entered into relationships with people who refer work to them which have turned out to be problematical. About five or six years ago there were a series of disciplinary cases arising from solicitors’ involvement in the Miners’ Compensation Scheme work where solicitors gained work from claims management companies and trade unions and where it was alleged that clients were not fully advised as to whether paying a referral fee was in their best interest. A similar issue was raised here. An introduction fee was paid but it was based on success which may provide the solicitor and introducer with the wrong incentives and it was found that clients were not properly advised.

This case involved various other issues although they were interrelated. Another issue was the relationship between the ownership of the firm and the people who were funding the claims. It appeared that a conflict of interest was involved and the clients received no independent advice. So the conflicts of interest and the funding of cases were part of the same problem. The financial relationship between the parties centered on the solicitor and some individuals who were running the practice.

The case is significant in that it is the latest case which demonstrates the dangers of solicitors entering into arrangements involving both the obtaining of clients and the funding of their claims. This area presents a moral hazard – the more solicitors are involved in the funding of their clients’ work, the more ethical and regulatory dangers they face.

What are the implications for law firms?

The case clearly shows that solicitors must be very careful when obtaining instructions from clients and also funding their litigation. These are situations in which they can easily compromise their own integrity and their duties to their client. The duties and responsibilities involved in these situations must be thought through very carefully. The SRA’s Code of Conduct sets out various principles on the relationship between solicitors and third parties. In this case, reference was made to the SRA having provided some guidance on it – para 28 refers to the guidance applying in April 2009. Chapter 9 of the current SRA Code addresses fee sharing and referrals and states that the desired outcome is to protect clients’ interests in relation to these matters.

The economies of scale in some work, like personal injury and payment protection insurance (PPI) work, means that firms can be handling a substantial number of matters at any time – so very sound procedures are needed to ensure compliance with their professional duties. The SRA, while it provides guidance on issues, won’t be drawn into providing advice on individual procedures so it is up to firms to ensure that their procedures are compliant. Quite a few firms get independent advice from solicitors who practice in the regulatory area as to whether their procedures are robust enough to ensure compliance. It is important for firms who are not sure to protect themselves in this way.

Are there still any grey areas law firms will need to watch out for?

I’m not sure if there are any grey areas. There are, however, areas of work in which the relationships are quite complex and there are various parties and agreements involved. In these cases, solicitors have to go back to basic principles and consider whether the proposed arrangements are in accordance with their duties as regulated firms. They must step back and ask if the arrangements will compromise their client’s interests or involve any diminution in trust in the profession. Although the relationships may be complex, the underlying law involved is not unclear.

Are there any trends emerging in the law in this area?

I think there is definitely an increase in the number of complex arrangements around claims. The complexity is likely to increase where there is external ownership of the law firm. A classic scenario would be where a claims management company acquires a solicitors practice so there is no longer a referral fee paid for work but the company finds its own claims and then processes them through its law firm. This sort of situation can make it more difficult to assess the regulatory issues involved and firms must examine how their ownership structure affects their compliance.

Regulators are generally very interested in the parts of the legal services market where referral fees are paid to firms as it tends to involve more vulnerable groups. It is about maintaining ethical standards while using innovative economic models to improve access to justice.

My prediction is simply that these sorts of cases will not go away. There are certain areas of practice where complex arrangements and relationships are prevalent. These include personal injury, PPI and some Consumer Credit Act 2006 work. Solicitors working in these areas must take special care to ensure that they are compliant.

By Iain Miller, partner at Bevan Brittan LLP (Interviewed by Diana Bentley).

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on Lexis®PSL.

Filed Under: Legal Services

Relevant Articles
Area of Interest