Referral fees, commissions, or more colloquially, ‘spotter’s fees’, are an integral part of many businesses’ marketing today.
From a consumer’s viewpoint, the question sometimes arises as to whether the arrangement should be made more transparent to the ultimate end user of the goods or services.
What is the nature of the relationship?
The answer to this question lies in the type of relationship that the seller has with the consumer. Relevantly, is the relationship between the parties fiduciary? A fiduciary relationship is where one party is in a position of trust, confidence and responsibility in which their primary duty is to act in the interests of the other party. It attracts unique ethical duties and includes relationships between:
- broker/retail client
- partner/partner, and
It can also apply to any relationship where one party places their trust and confidence in another party and relies on them, causing an imbalance of power in the relationship.
It is, however, unlikely to apply to the host of other situations where someone you are dealing with may be receiving a kickback for introducing you to another business. For example, a tow truck driver and a car owner, or even a travel agent and a traveler. This is because the tow truck driver and travel agent are not in a special relationship based on trust, confidence and responsibility to the car owner or the traveler.
Returning to the question asked at the outset, the type of relationship between the seller (the spotter/referrer) and the consumer (the spottee/referee) must firstly be a fiduciary relationship. It is then appropriate that the consumer know all that there is to know about any commercial relationships that the seller may have with third parties. The consumer can then make an informed decision and is alive to any conflicts of interest that may develop as a result of them.
What does Australia’s legislation say about referral fees?
Australian legislation reflects the importance of these duties by enacting legislation rather than relying on the ‘unwritten’ case law. Non-compliance with these statutory obligations can have serious implications for the licenses that professionals are usually required to hold to practice their profession.
For example, the Property, Stock and Business Agents Act 2002 (NSW) governs, amongst other things, the law relating to real estate agents in NSW. It contains some express provisions about the disclosure of commissions and kickbacks. Specifically, section 47 requires the agent to disclose to a referee (consumer) at the time of referral any referral relationship, including the value of any referral fee that they may receive. This referral relationship can be financial or otherwise, and can be with service providers such as lawyers, insurers, mortgage brokers, property valuers and building consultants.
This section also requires the agent to disclose any special additional success fees that third parties such as marketing businesses stand to receive from the agent on a successful sale of the property. The agent must make these disclosures formally in writing and on an Office of Fair Trading approved form. The referee must also acknowledge this in writing.
Section 57 is another important provision that requires real estate agents to set out in their agency agreements the source and amount of all rebates, discounts and commissions that they will receive from third parties. This ‘spotter’s fee’ must be in connection with any expenses their clients pay and include property maintenance, advertising and auctioneer’s fees. Clients must give their informed consent to these fees that, essentially, supplement the amount of the agreed sales commission that the agent receives from their client.
Another example illustrating a 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 remuneration, including any commission and any other benefits or advantage they will receive if their advice is taken, and anything at all that might affect the broker’s advice.
Whether or not the legislation explicitly refers to or contains these concepts, they apply to almost all fiduciaries. And of course, if a referrer is asked directly about their commission, it would be misleading and deceptive conduct to state that there was no commission or fee payable if there was!
In part 2 of this series we will have a look at “referral selling” and why is it illegal under section 49 of the Australian Consumer Law. If you had any questions about referral fees, you should speak with one of LegalVision’s experienced business lawyers. Please call us on 1300 544 755 and talk to us about how we can best assist you.