Solicitor referral fees for mortgages and bridging: what the SRA rules allow

01

The LASPO ban and its limits

Section 56 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 bans referral fees in the course of prescribed legal business. That means claims for damages for personal injury or death, other claims arising out of circumstances involving personal injury or death, and business specified in regulations by the Lord Chancellor.¹

On the face of the Act, a referral to a mortgage or bridging broker sits outside the ban unless it forms part of a personal injury matter. The SRA's referral fee warning notice is framed the same way, and says that where arrangements are permitted by law, paragraphs 5.1 to 5.3 of the Code apply.¹⁴

02

What the SRA Code requires

Paragraph 5.1 requires that clients are informed of any financial or other interest you, your business or your employer has in referring them to another person. Paragraph 5.3 says you only refer, recommend or introduce a client to a separate business where the client has given informed consent. The SRA's guidance says informed consent will always involve telling the client about the nature of your links to that business.²⁵

Paragraph 4.1 deals with the money. You properly account to clients for any financial benefit you receive as a result of their instructions, except where they have agreed otherwise. The SRA Glossary defines a financial benefit to include any commission, discount or rebate.²³

Paragraph 5.2 adds that if the SRA thinks you have made or received a referral fee, it will treat the payment as one unless you show otherwise.²

03

The FCA side: introducing without authorisation

For regulated mortgage contracts, which include most second charges on a client's home, the introduction itself must stay outside regulated activity. Article 33A excludes introductions to an authorised firm if you receive no money paid by the client for the transaction, other than money payable to you on your own account, and if before the introduction you disclose any fee or commission, any other reward and any group connection with the firm.⁸

Solicitors' firms can also use the Part XX exemption for professional firms, under the SRA Financial Services (Scope) Rules. The FCA's guidance says arranging a regulated mortgage contract is not a non-exempt activity, so a firm can do it under the exemption if the other conditions are met. Recommending that a client takes a particular regulated mortgage is non-exempt.⁷¹¹¹²

One of those conditions mirrors paragraph 4.1. Under section 327(3) of FSMA, the firm must account to the client for any reward from a third party, which the FCA reads as holding it to the client's order.⁹¹⁰

04

Conflicts when you also act on the property

A financial interest in where a client takes their finance can conflict with your duty to act in their best interests. The SRA's conflicts guidance lists a financial interest of yours, or someone close to you, as an own-interest conflict, and there are no exceptions to the ban on acting in one.⁶²

Where you are also acting on the purchase or the remortgage, keep the referral and its payment visible to the client from the start, and record their consent. If the payment would influence your advice on the transaction, don't take it.

05

Before you refer a client

A short checklist drawn from the rules above. It is not a substitute for the SRA's guidance.

• Check the referral is not part of a personal injury matter
• Tell the client about any payment, how it's calculated and any link with the broker
• Get the client's informed consent to the referral, in writing
• Account to the client for any payment, unless they've agreed you can keep it
• Don't take any money from the client for the loan
• Record what you disclosed and the client's consent on the file

06

Referring clients to Charles Frank

Charles Frank Finance is FCA authorised to advise on and arrange mortgages and second charges, and we place bridging finance. We agree any referral payment with your firm in writing before you refer, so you can disclose it and record the client's consent. We advise the client and keep you updated in your portal. Your client's legal work stays with you.