Does information help clients understand lawyer fees?

Certain conflicts of interest between their lawyer and client are not forbidden but protected against by the notion of informed consent.  In particular, this applies to lawyers discussions with their clients about their own fees and in relation to referral fees and is the reason Rule 15 (now Rule 2) was developed for solicitors.  My own research on lawyers advice on their fees (the ‘Something for Nothing’ Report) tends to suggest that when solicitors advise on their own fees a significant number do not follow their own ethical rules, or they do so advise and clients forget or do not understand that advice, and do not structure their fees in the client’s best interests.  The SRA’s work on referral fees suggests similar levels of non-compliance with referral fee regulation (See, the Legal Service Board Consumer Panel report on referral fees at para. 8.21).  The FSA also found similar problems with investment advisers.[1] A typical response to such concerns (beyond querying whether such research definitely proves non-compliance) is that regulation can improve transparency: make the information more comprehensive, or more intelligible, more useful, more informative.  The Government sought to go down this route recently with the Damage Based Agreement Regulations 2010 which have tightened information requirements for contingency fees and the Legal Services Consumer Panel are appear to be thinking along similar lines in part of their work on referral fees (they have other ideas too, see here).

The research base suggests, however, that a regulation through information approach will fail.  A significant body of work commissioned by the FSA into its reforms of investment advisers suggested that the evidence did not support the hope that better information would reduce conflicts of interest, increase competition, promote consumer empowerment/shopping around  and get consumers understand the cost of advice they incur (via commissions).[2] Even where information improved understanding, that understanding was limited[3] and did not influence behaviour.  This was inspite of research suggesting consumers would react warmly to information and the information being subject to detailed testing before hand.[4] Why does such failure occur?

Problems of non-compliance by professional advisers (complexity of the information requirements may be a factor, as may the problem that such requirements – if carried out in good faith – may run counter to the adviser’s own interests).

The information is probably too complex for many clients to understand and act upon (see ‘Something for Nothing’). For example, some Unions pitch their literature at the reading age of an 11 or 12 year old.

Clients psychological predispositions may inhibit them from acting on the information they receive.  Thus behavioural psychologists point to:[5]

…a collection of deep seated cognitive biases that influence decisions in both financial and non-financial contexts.  These biases include, “procrastination, regret and loss aversion, mental accounting, status quo bias and information overload.”

So, to give one example, procrastination may lead to clients discounting a future cost (if they agree to pay something later they are less vigilant about that cost than if they are asked to pay it straight away).  This may increase the amount they are willing to pay in commissions, lead them to be unconcerned about referral fees, and agreeing higher contingency fees than are in their favour.

“Many behavioural economists take the view that the best response [to procrastination biases] is not informing consumers of the problem or trying to change them but institutional design and regulation that recognises the psychology.”

The latter point is an intriguing one.  It suggests that the Law Society, Government and (it appears) the Legal Services Consumer Panel desire to increase transparency in relation to lawyer’s may have minimal beneficial impact on consumers, whilst increasing the transaction costs of advice providers.

One solution would be to regulate-out unnecessary complexities in lawyer fee arrangements so that consumers could understand the costs which they were about to incur and take decisions with some greater likelihood of their own interest.  Take contingency fees, as permitted in (for example) employment tribunal cases.  At the moment some solicitors often define ‘win’ in a way that the client does not understand, they differ in whether they charge bid disbursements on top of any percentage fee they charge (and what would count as disbursements), and differ in their approach to VAT.  Client’s do not understand these differences.  A regulatory approach which said that all contingency fees operated on a uniform basis, with all costs included within the fee would mean that all a client had to understand was the percentage fee.  They have a clear and honest signal on price.  They could begin to shop around and price comparison sites could aid them in a search for a lawyer at the price they wanted.  Contingency fee lawyers would have to bear higher risk and higher costs to take cases on such a basis but, with a level playing field, this could be reflected in their percentage fee.  It is already clear it is an economic model, because a substantial body of practitioners conduct contingency fees on that basis.  This body of practitioners do so for business reasons but they also have developed a model of contingency fees which is in accordance with the client’s view of how such fees work.  This has to be both the more ethical approach and, it seems to me,  one which works best from a market perspective.


[1] TNS (2006) Depolarisation disclosure – mystery shopping results (London: FSA).  130 face-to-face mystery shopper assessments with a range of advisers across the UK mainland. In only 55 cases (42%) were the potential customers given the Menu and the Initial disclosure document (IDD) at the correct point in the interview.

[2] See, Darren Butterworth, Kyla Malcolm, Mark Tilden and Tim Wilsdon (2007) ‘An Empirical Investigation into the Effects of the Menu’ (London: FSA); GfK (2008 ) Depolarisation Disclosure 2 (London: FSA)

[3] BRMB (2008 ) Services and costs disclosure, Qualitative research – mock sales testing (London: FSA).

[4] IFF Research Ltd and NOP Research Group (2004) Polarisation – menu testing research Research prepared for the Financial Services Authority, FSA (London: FSA))

[5] David de Meza, Bernd Irlenbusch, Diane Reyniers (2008) Financial Capability: A Behavioural Economics Perspective (London: FSA).  The quotes are taken from pages 3 and 4.

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About Richard Moorhead

Director of the Centre for Ethics and Law and Professor of Law and Professional Ethics at the Faculty of Laws, University College London with an interest in teaching and research on the legal ethics, the professions, legal aid, access to justice and the courts.
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3 Responses to Does information help clients understand lawyer fees?

  1. Pingback: Some thoughts on will writers… « Lawyer Watch

  2. Pingback: Transparency for who? Regulating Referral Fees « Lawyer Watch

  3. Pingback: Competition vs Regulation | Lawyer Watch

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