Q: I have a number of clients who need some financial planning advice. Keeping all their money under the mattress is probably not the best option. A firm of financial planners recently approached me to promote their services. They are offering me $200 for every client I refer to them. Should I agree?
A: We receive many queries about referral fees. To many of us, they are in a rather grey area ethically. We have recently been considering the draft Motor Accidents Compensation Regulation 2015. If it comes into force as drafted, it will ban referral fees in the motor accidents sphere.
A good starting point in any consideration of referral fees is to ask – are they legal? To answer this question you would need to consider secret commissions legislation and the like.
What we look at are the professional ethical implications and that brings us to rule 12 of the Conduct Rules. Rule 12 is the broad obligation to avoid conflicts between your own interests and your client’s interests. It also sets out a number of situations that are deemed not to be a breach of the rule. One such situation is the paying or receiving of referral fees.
However, this does not mean that referral fees are always fine and do not create a conflict. The rule does not go that far. For instance, if you judged that the client would be better off with another firm of financial planners or a different expert altogether, but you were too keen on that referral fee and referred them anyway, then that would probably be a breach of your ethical obligations.
If you ended up disclosing confidential information to the financial planners to secure the fee, for instance anything about the legal services you provided to the client, then that would probably be a breach of rule 9 and your confidentiality obligations. This is particularly likely where the referral fee is paid by the solicitor and is a trailing fee, relating to the nature and not just the existence of the retainer.
Also, rule 12 extends to a conflict between your client and the interests of an associate of yours. Associate is defined very broadly in the rules and includes entities in which you have a material beneficial interest and also family members.