This article first appeared on Lexis PSL in July 2013. Robert Forman was interviewed by Duncan Wood at Lexis Nexis

What are inducements?

Firms looking to get a leading edge on their competitors have been offering gifts such as £250 cashback, an iPad or shopping vouchers to attract clients’ business, usually, their personal injury claims. Invariably, the gift is subject to the firm accepting the claim.

How commonly are such incentives used by law firms?

There are no figures available to say how common the practice is, but it is easy to find advertisements for such incentives. The government and the SRA take different views on incentives. In 2010 Lord Young reported that ‘Britain’s ‘compensation culture’ is fuelled byconstant adverts in the media offering people non-refundable inducements’. However, in the SRA’s press release of 26June 2013, it concluded that there wasn’t a significant problem.

Is this the continuation of referral fees by the back door?

Judging by the type of gifts advertised, the cost to the firm is not dissimilar to the sums referral fees previously paid. However, inducements are not referral fees in the sense prohibited. Effectively, the offering of gifts has simply brought marketing back in house.

What were the original concerns about client inducements?

Lord Young’s 2010 report recommended that the MoJ and the SRA ought to ban inducements and he invited both to change their rules. He concluded that inducements increased the growth of a compensation culture, induced suspect claims, damaged the reputation of the legal profession, and unfairly impacted on SMEs on account of the additional costs caused by trading in fear of litigation and in lacking the resources to defend claims.

Consequently, on 1 April 2013, the MoJ amended the Conduct of Authorised Persons Rules 2013, to introduce a new Rule 6b, ‘In soliciting business through advertising, marketing and other means a business must not offer any cash payment or a similar benefit as an inducement for making a claim.’

What stance has the SRA taken?

On 25 June 2013 the SRA produced a Guidance Note, ‘Offering inducements to potential clients or clients’. It made reference to Lord Young’s report and the MoJ ban, but concluded that a ban would not be implemented on account of a lack of evidence that it was a significant problem, or that clients’ interests were at risk. The SRA also concluded that there was no evidence to suggest that inducements encouraged spurious claims to be made.

What does this mean in practice? Are there any remaining concerns, or could there be unintended consequences or pitfalls?

Despite rejecting Lord Young’s recommendation for an outright ban, the Guidance Note leaves open the possibility that on a case by case basis, those offering inducements could be guilty of professional misconduct.

Agnieszka Scott, SRA Director of Policy, said, ‘The Guidance Note has been produced to remind solicitors of their obligations as they look to promote themselves and attract new business – remembering that their publicity should not be inaccurate or misleading and that clients do not suffer.’

Is there anything lawyers should take particular note of?

The Guidance Note sets out a two-stage test for solicitors to apply:

‘When deciding whether it is appropriate for you to offer an inducement, you may wish to consider the following factors.

  • Does the offering of an inducement fuel a compensation culture?
  • Is the offering of an inducement limited solely to personal injury work and does the offering of an inducement influence the decision to instruct as opposed to making a decision which is based on expertise and the quality of services offered?
  • Is the offering of an inducement aimed at vulnerable consumers?
  • Does the offering of an inducement result in your firm taking on improper or spurious claims? If so, does that lead to increased costs to businesses, consumers and indemnifiers to cover the expense of defending claims?
  • Do inducements promote access to justice?

 If you do decide to offer inducements to clients or potential clients, you should take steps to ensure that: 

  • they are not taken advantage of and do not suffer detriment,
  • they do not instruct your firm as a result of misleading information or publicity,
  • they have sufficient information to make informed decisions about instructing you,
  • they receive independent advice and a proper standard of service,
  • their interests do not conflict with your or your firm’s interests,
  • the fiduciary relationship with you is not adversely affected.’

Is this a desirable development – surely practitioners are tired of over-regulation?

While it remains possible for firms to continue offering such inducements, the Guidance Note indicates that there are several pitfalls awaiting those firms that have not thought through every possible eventuality and are unable to demonstrate that they have addressed the issues contained in the checklists.

Therefore while a ban has been avoided, those engaging in such practices are likely to find increased regulation and monitoring.

Those opposing the SRA’s rejection of a ban argue that inducements exacerbate the perception of the compensation culture and encourage fraudulent claims. Many lawyers are concerned for the reputation of their professions, seeing such inducements as grubby and ill-befitting their role in society. However, for the policy makers the cost of legal services seems to be of greater concern than the reputation of the profession.

Those offering inducements might argue that fraudulent claims are not encouraged as the inducement is only paid on acceptance of the claim, which usually means following consideration of medical evidence supporting the claim. Notwithstanding that safeguard, practitioners need to be alert to the possibility of such bogus claims.

Robert Forman, senior associate at Murdochs Solicitors, and at the Lawyers Defence Group – specialising in solicitors’ professional regulation and discipline.