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Referral fees, commissions or ‘spotter’s fees’ are the payments service providers make to third parties in return for recommending their services or sending customers to them. 

These fees are not illegal. In fact, they are an integral part of many businesses’ marketing and lead-generation activities. 

While referral fees are not illegal, referral selling is. This article also outlines the difference between referral fees and referral selling. This is a very important distinction for your business.

This article outlines when you should disclose referral fees to the consumer of your goods or services. 

Referral Fees vs. Referral Selling

Under Australian law, referral selling is illegal. Referral selling is the practice of representing to a customer that they will receive a discount or benefit for purchasing a product, but only once they refer a second customer and that new customer also purchases the product.

This type of referral selling is illegal because there is no assurance that the second customer will purchase the product. This means the customer is incentivised to buy a product because of a discount or benefit they may never actually receive.

However, it is legal to boost your leads or sales by paying people referral fees or spotter’s fees. If you are transparent with consumers and obtain their informed consent at the time of the referral, this practice is acceptable. To decide whether or not to disclose a referral fee arrangement to the consumer, you should consider:

  1. the nature of your relationship with the consumer; and
  2. Australian laws relating to referral fees.

Your Relationship with the 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;
  • partner and partner; and
  • trustee and beneficiary.

Fiduciary relationships may arise from:

  • express agreement of the parties; or
  • a court identifying a fiduciary relationship by the parties’ conduct. 

This means that a court could find a fiduciary relationship in 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. 

However, there are many situations where someone you deal with may be receiving a referral fee or kickback for introducing you to another business, but the relationship is not fiduciary. 

For example, a travel agent and a traveler do not have a fiduciary relationship. This is because the travel agent is not in a special relationship based on trust, confidence and responsibility with the traveler. 

If the relationship is fiduciary, the consumer should know about any commercial relationships that the seller has with third parties. This allows the consumer to:

  • make an informed decision; and
  • be aware of any conflicts of interest that might arise. 

Australian Law and Referral Fees 

Fiduciary duties are set out in Australian law. Failing to comply with these duties can have serious implications.

For example, the laws relating to real estate agents in NSW contain strict rules about the disclosure of commissions and kickbacks. The agent must disclose any referral relationship to a consumer at the time of referral, including the value of any referral fee that they may receive. 

The agent must also disclose any additional fees that third parties (e.g. marketing businesses) stand to receive upon the sale of the property. These disclosures must be made formally in writing. 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 will receive from third parties in connection with any expenses their clients pay, such as:

  • property maintenance;
  • advertising; and
  • auctioneer’s fees.

Clients must give their informed consent to these fees.

Another example of referral seller’s disclosure obligations is an insurance broker providing personal advice to retail clients (e.g. 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 else that might affect the broker’s advice.

Whether or not the law explicitly refers to these requirements, they apply to almost all fiduciaries. 

Key Takeaways 

While referral fees are not illegal, referral selling is. Although referral fees are not illegal, there are situations where you should disclose the referral arrangement to the consumer. When deciding whether to disclose, you should consider the:

  • nature of the relationship with the consumer; and
  • relevant laws. 

If you are in a fiduciary relationship with the consumer, it is very likely you will need to disclose any referral fee arrangements. If you have questions about disclosure obligations, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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