Expert opinion: Official guidance on disclosing referral fees ‘is just not practical’

The provision of referral fees is and has been standard business practice across a wide range of business sectors for many, many years.

It has been so in estate agency and letting agency for as long as I can remember, so why it has now become an issue for the Government I will leave you to ponder.

For clarity, letting agents who obtain referral fees are not covered in this guidance from the industry regulator, the National Trading Standards Estate Agency Team.

It therefore appears that the Government does not think that letting agents are in breach of the Consumer Protection from Unfair Trading Regulations (CPR) if you fail to make a transparency declaration – for now anyway. But of course NTSEAT does not regulate letting agents, only sales agents.

I am led to believe that lettings guidance on this is, however, likely once the new lead authority for letting agents starts work next month.

I must say that I am not convinced that failure to disclose a referral fee is, in general terms, a breach of the CPR, but that point may end up being decided in the courts.

However, on reading the guidance I was firstly staggered to read that some agents actually receive contributions to their children’s school fees from companies to whom they refer business. Apparently, some agents get cases of champagne for referrals,

In fact, cases of Krug champagne being passed over appear to be common, because they are specifically mentioned in the guidance. A quick search online revealed a case of Krug can cost up to £24,000!

I was even more staggered to think agents admitted to them happening. HMRC might well be very interested in such gratuities and there is a piece of legislation called the Bribery Act!

Additionally, there is no mention of General Data Protection Regulations or the obligations under that legislation, which indirectly link to this disclosure requirement.

Those aside, my real concern is the outlined disclosure process the official advice is recommending.

The guidance states that, in relation to sellers you should use the included disclosure form as part of your agency agreement to outline the referral fees to clients, with a separate form used for each business you obtain referral fees from.

Given that agents refer sellers to solicitors, finance brokers and potentially others like auction sales, removals, insurance, surveys, building contractors, etc, there might be five or six extra sheets required in your agency agreement.

This is not practical, and I think agents should individually come up with a more concise, but clear, route to make the disclosure that fits with their business model.

NTSEAT also wants you to pass on an additional disclosure form to the consumer when a referral is made.

My view is that this is unnecessary, because the referral fee information and the consent to refer request needed to meet GDPR requirements is likely to be included in the agency agreement, therefore an additional disclosure form is duplication.

In relation to potential buyers it states that the forms should be “incorporated into or annexed with the property particulars before any ancillary services are promoted”. (The word “before” is bold in the guidance.)

The fact that NTSEAT wants agents to disclose at this point is strange, because no agent refers a prospective buyer looking at property details to third party services.

It will also be very difficult for an agent to argue they met an obligation to disclose if it was done before any discussion took place about a referral and so disclosure in property details is of no value to consumers or agents.

The need for any disclosure of referral fees does not really exist until a third-party referral is offered and no referral can generally take place without obtaining consent (GDPR). This is therefore the exact time for making the referral fee disclosure not in a brochure!

A worrying fact is that three trade bodies and the two ombudsman schemes had an input into the document and not one of the organisations has made any critical comments about it. In fact, the NAEA are pretty supportive of it which is surprising, given how impractical it is.

In my view, agents will have to consider their position and make decisions about whether they follow this guidance as is, or take a different approach.

This is only guidance and so different approaches are not out of the question; however, any complaint about failure to disclose will initially be directed to one of the Ombudsman services, and as they had an input into this document, what stance they will take if an agent has not followed the guidance they helped to produce, who knows!

I already have meetings arranged with clients to discuss this thorny issue and I suspect each one will take a different view.

* David Beaumont runs Compliance-Matters, a specialist in agency compliance and he provides a free compliance advice line to EYE subscribers. If you would like advice on this subject or any other compliance issue give him a call on 0161 727 0798

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3 Comments

  1. HGB

    The problem with referral fees (aka secret commissions) is that the consumer ends up paying more than they otherwise need to and they don”t necessarily get a better service as the one being suggested is based on how much the person doing the referring gets, rather than the quality of service.

    It is a cancer in the industry and makes all estate agents look greedy. Similarly with letting agents, skimming monies off tradesmen, this is underhand as well.

    Why can’t the industry just charge a proper headline fee that covers their costs and profit, rather than constantly being duplicitous?

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  2. Local Independent

    I agree regarding letting agents skimming off contractors, you get paid to manage a tenancy, that’s what you do!

    However I disagree that agents are bumping up the cost of (for example) conveyancing by getting a fee. AS LONG AS IT’S A FAIR FEE IN PROPORTION> If lawyers didn’t pay an agent then they would have to externally market their businesses to the public, or do less cases, these scenarios will see the prices go up further.

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  3. Woodentop

    People need to remember who NTSEAT are!!!!!

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