In the rollercoaster ride that can be buying a home, it is no surprise that many consumers use the conveyancer recommended by their estate agent.
Research undertaken by the Council for Licensed Conveyancers (CLC) last year found that this was the single most popular factor in choosing a conveyancer – followed by price, previous experience of that lawyer, and suggestion from family or friends.
But what 59% of those who went along with the estate agent’s recommendation did not know was whether the lawyer had paid a fee for the work.
Consumers’ choice
There is something going wrong here. Speaking at the CLC Annual Conference in January, housing minister Heather Wheeler said: “Buyers choose the house, not the estate agent, but this shouldn’t mean that they choose their conveyancer by default.
“While referral fees are an important feature of the industry, and a way of reducing marketing costs and building business, I’m concerned about the current lack of transparency… Consumers should always know they have a choice.”
New rules came into force in December that require lawyers to publish cost and service information on their websites to make it easier for consumers to shop around for conveyancing services.
This should include whether CLC-regulated lawyers enter referral arrangements with third parties and if so, the average amount they pay.
They are not expected to publish specific details of individual referral arrangements, but it has long been the case that, when they confirm their instructions from their client for the first time, CLC-regulated lawyers have to set out what they have paid. There are similar provisions in place for solicitors.
NTS guidance
While lawyers have had rules around referral fees for some time, they are new for estate agents. Last month, National Trading Standards (NTS) published guidance on how and when estate agents should disclose referral fees.
This guidance covers any referral arrangement the estate agent may have, be that for financial advice, removal company or conveyancer.
It warns that failing to disclose referral arrangements risks criminal prosecution under the Consumer Protection from Unfair Trading Regulations 2008. NTS could also take action under the Estate Agents Act 1979.
The guidance says an estate agent should disclose “in plain terms”:
• The price of its services, including any ‘compulsory’ extras;
• Where a referral arrangement exists, that it exists, and with whom;
• Where a transaction-specific referral fee is to be paid, its amount;
• Where a referral retainer exists, an estimate of the annual value of that retainer to the estate agent or its value per transaction; and
• Where the referral is rewarded other than by payment, an assessment of the annual value of the reward or the value of the reward per transaction.
The disclosure should be made in writing, to a seller as part of standard terms and conditions and to buyers by being incorporated into or annexed with the property particulars before any ancillary services are promoted.
They should also make it clear that the consumer can choose to source this service from another provider
“The disclosure must be made in a way which is clear, intelligible and unambiguous and have no lesser prominence in documentation than other important terms, conditions, or information.”
The guidance also cautions estate agents that they could not rely on lawyers’ obligations to disclose referral fees. It “strongly recommended” that estate agents use a pro-forma declaration produced by NTS when disclosing referral fees.
“The seller should be handed one completed form identifying referral fees as a consequence of referring them. A separate form should be handed to the buyer identifying any referrals likewise applicable. Keep copies of the referral forms form for both seller and buyer on the property file.”
Transparency
We consider the NTS guidance to be another welcome step in improving the home-buying process. Transparency across the whole market is essential.
We want consumers to be able to make an informed choice based on all the available information. The combination of the guidance with our own rules means consumers will be more empowered than ever before.
Ms Wheeler has provided NTS teams with extra funding to support this work, and she has asked them to report back in 12 months.
She warned: “I expect this to mean an end to excessive referral fees, but if behaviour doesn’t change, I will look again at the case for a ban.”
The message is clear. Referral fees have their place in the market, but if the government considers that they are increasing costs unnecessarily, it will act. In 2013, it was exactly this concern that led to a statutory ban on solicitors paying referral fees to claims companies for personal injury cases.
The onus is now very much on estate agents to make consumers aware when fees are being paid, consumers must be in a position to make an informed choice of their conveyancer based on all the facts and this includes whether a fee is paid for a recommendation.