Referral fees, often known as commissions or ‘spotter’s fees’ are the payments service providers offer to third parties as a reward for recommending their services or sending customers to them. Referral fees can be an integral and legitimate part of many businesses’ marketing and lead-acquisition strategies. However, referral fees can be illegal in certain circumstances. Referral selling, on the other hand, is always illegal. It is important for businesses to understand the differences between the two. which this article will delve into. This article will explore the differences between referral selling and paying referral fees. Additionally, this article discusses when and how businesses should disclose referral fees they earn to their customers.
Referral Fees vs. Referral Selling
Under the Australian Consumer Law (ACL), referral selling, whereby a customer is promised that they will receive a discount, rebate, or benefit on the condition that they refer another buyer who makes a purchase, is illegal.
This is due to the uncertainty of whether the second customer will purchase the product or service, leading to a potentially unfulfilled promise for the original customer. The original customer is incentivised to buy a product or service because of a discount or benefit they may never actually receive.
It is, however, legal in most circumstances to boost your leads or sales by paying people referral fees or spotter’s fees, provided there is transparency and informed consent with consumers at the time of the referral. To decide whether or not to disclose a referral fee arrangement to the consumer, you should consider the:
- nature of your relationship with the consumer; and
- relevant Australian laws concerning referral fees.
Your Relationship With the Consumer
Where a referral fee could influence a recommendation, it is particularly important that you disclose the fee to the consumer when providing the recommendation.
To assist in determining whether you should disclose a referral fee to a consumer, the key question to ask when considering the nature of your relationship with the consumer is whether your relationship is ‘fiduciary’.
In a fiduciary relationship, one party is in a position of trust, confidence and responsibility. In this case, this party’s primary duty is to act in the interests of the other party.
Fiduciary relationships include the relationship between:
- solicitor and client;
- doctor and patient;
- director and shareholder;
- accountant and client;
- partner and partner; and
- trustee and beneficiary.
As well, fiduciary relationships may arise from:
- the express agreement of the parties; or
- a court identifying a fiduciary relationship by the parties’ conduct.
Not all commercial relationships are fiduciary.
If the relationship is fiduciary, the consumer should know about any commercial relationships or seller affiliations that the seller has with third parties. This allows for transparency and for the consumer to:
- make an informed decision; and
- be aware of any conflicts of interest that might arise.
Disclosure Obligations for Agents and Brokers
In New South Wales, under the Fair Trading Act, specific disclosure requirements mandate that intermediaries, like agents or brokers, must take reasonable steps to inform customers of any commission or referral arrangements with other businesses prior to the supply of goods or services. However, these intermediaries are not required to disclose the nature or the value of the financial incentives involved in these arrangements.
Australian Law and Referral Fees
Failing to comply with fiduciary duties can have serious implications.
For example, the legislation governing real estate agents in NSW contains strict rules about the disclosure of commissions and kickbacks. Agents must disclose any referral relationship to a consumer at the time of referral, including the value of any referral fee that they may receive. If a conflict of interest emerges, an agent is prohibited from accepting such a fee.
Agents are required to disclose any additional fees that third parties, such as marketing businesses, stand to receive upon the sale of the property. These disclosures must be made formally in writing and the consumer must also acknowledge these fees in writing. Real estate agents must also set out in their agency agreements the source and amount of all rebates, discounts and commissions that they anticipate receiving from third parties related to client expenses, such as:
- property maintenance;
- advertising; and
- auctioneer’s fees.
Clients must give their informed consent to these fees.
In some states, including South Australia, Western Australia and Tasmania, real estate agents are prohibited from participating in referral fee programs.
Insurance Brokers Case Study
Another example of referral seller’s disclosure obligations is an insurance broker providing personal advice to retail clients, such as individuals and small businesses. Insurance brokers must disclose details of:
- their remuneration (including any commission and any other benefits or advantage they will receive if their advice is acted upon); and
- anything else that might affect the broker’s advice.
Regardless of whether the law explicitly sets out these requirements, they generally apply to almost all fiduciaries.
Health Workers Case Study
Health workers can also be obliged to disclose to consumers when they receive referral fees. In New South Wales, for instance, health workers must actively avoid any perceived conflicts of interest and ensure they do not make decisions that are influenced by personal gain, such as acceptance of a referral fee.
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
Key Takeaways
Referral fees are not illegal, but there are specific circumstances where they can be. On the other hand, referral selling is always illegal. While many referral fees remain within legal bounds, there are instances where you should disclose the referral arrangement to the consumer, keeping in mind applicable laws and regulations. In determining the need for disclosure, you should consider the:
- nature of the relationship with the consumer; and
- relevant laws and guidelines.
If you share a fiduciary relationship with the consumer, it is imperative and most often legally mandated, to disclose any referral fee arrangements.
If you need help understanding whether you have any disclosure obligations, contact our experienced business lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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