New rules will soon force estate agents to explain their commercial arrangements to customers, as part of a wider campaign to clampdown on kickbacks.
Research has revealed that the vast majority of buyers and sellers choose their conveyancing solicitor as a direct result of a recommendation by their estate agent, according to research from the Council of Licensed Conveyancers.
But most of them have no idea the agent then receives a kickback, which can be as much as £100 to £300 pounds a go.
While this might not affect the quality of the work, as a result of this practice homebuyers are often pushed towards a service because it benefits the estate agent, not necessarily because it benefits them.
New rules will force estate agents to explain their commercial arrangements to customers
Now the conveyancing regulator has decided enough is enough and from December, agents and solicitors will have to tell you if they’ve received a fee for your business.
Sheila Kumar, chief executive of the CLC, said: ‘We are not saying that it is wrong for conveyancers to pay referral fees, but transparency is key. It is important that the client is aware of the payment of referral fees before deciding who to appoint.’
Under new rules the regulator is bringing into effect this December, firms will be expected to provide this information earlier in the process, when consumers are shopping around for a conveyancer.
The move is part of a wider clampdown on what have been accused of sometimes murky practices in the estate agency world.
The Government has made it clear all homebuyers and sellers should be told who is earning what far earlier than they are currently.
Housing minister Heather Wheeler said: ‘Making the housing market work is about more than just building homes. It is about helping hard working families buy and sell with confidence.
‘The findings from this valuable survey demonstrate why it is so important that estate agents are transparent about referral fees.
‘That’s why we are working with the industry to ensure estate agent referral fees are clear, so consumers can make an informed decision before they decide to purchase.’
It’s not just lawyers paying estate agents for your business. Mortgage brokers and valuers can also receive referrals in exchange for a fee.
But it’s important to remember that you don’t have to use any professional recommended to you – it pays to do your own research online, read customer reviews and ask for recommendations from friends, colleagues or family.
Other financial services are also benefiting from being recommended by estate agents
Why are referral fees in the spotlight?
Referral fees are a thorny issue – especially when customers don’t know they’re being paid.
They have been banned outright in other parts of the financial services market – for example, in 2012 the Retail Distribution Review banned investment advisers from receiving commissions for recommending a provider’s investment product.
The Financial Conduct Authority has subsequently investigated other markets to see whether commissions and referral fees encourage professionals to recommend bad products or services, just so they get the fee.
A Which? investigation found in June found that some estate agents are routinely leading homebuyers into using their in-house mortgage brokers, wrongly claiming they must do this to secure a home.
Three out of 10 high street estate agents told undercover researchers posing as first-time buyers that using their in-house mortgage broker would make a difference to the property purchase.
One agent even told Which’s undercover researchers that it could secure them a lower price for a property.
While it’s perfectly legal for agents to make a recommendation to a buyer, estate agents are not allowed to penalise them if they choose to use their own broker. Under the 1979 Estate Agents Act, all offers made by buyers must be referred to the seller regardless of whether or not the buyer has got their mortgage from the broker recommended by the estate agent.
The issue has now become a concern for the City watchdog, which launched a formal investigation into these practices two years ago – the final report of which is expected to be released this winter.
Paula Higgins, Homeowners Alliance CEO
Call for a blanket ban on referral fees
Last year, the Homeowners Alliance called for a ban on estate agents recommending in-house financial services to customers.
Paula Higgins, chief executive of the organisation, believes there is a clear conflict of interest in estate agents offering in-house services, such as brokers or conveyancers, to buyers.
‘Estate agents are instructed by – and thereby work for – the seller,’ she said.
‘Yet by offering financial services such as mortgages to clients the line between whose side they’re on becomes blurred.
‘Invariably, it seems they are acting in their own best interests rather than either parties.
‘Buyers who speak to in-house brokers also end up giving detailed financial information to the estate agent that can totally undermine their own negotiating position.
‘If the estate agent arranging your mortgage knows you can in theory afford as much as £270,000, you are not going to be able to dig your heels in arguing that you can only afford £260,000.
‘Meanwhile sellers can lose out because estate agents have an incentive to give preferential treatment to buyers who use their services, rather than the buyer who offers the best price.’