Routing referral fees through a solicitor in an insolvency case does not make an otherwise-barred payment compliant — the SRA and insolvency regulators look at the substance of an arrangement, not the label on the invoice. If money still ends up with the original introducer, the payment is judged on what it actually is, not on which account it passed through.
This matters because some introducers pitch a workaround: instead of the insolvency practitioner paying a referral fee directly (which the Insolvency Code of Ethics restricts), the fee is dressed up as a solicitor's charge, then quietly shared back. It sounds neat on paper. It is not neat in front of a regulator.
This article sets out how the scheme is usually structured, why substance-over-form thinking defeats it, and what a genuinely compliant introduction looks like instead.
The scheme: referral fees through a solicitor in insolvency work
The pitch usually runs like this. The insolvency practitioner (IP) cannot pay a referral fee to the party who sent them the case, because doing so would create an unmanageable self-interest threat under the Insolvency Code of Ethics. So a solicitor is inserted into the chain.
The solicitor is instructed to carry out some genuine-sounding legal work, often described loosely as "advice on the process" or "documentation review". The IP, or the company, pays the solicitor a fee for that work. The solicitor then passes some or all of it back to the original introducer, sometimes framed as a "consultancy" or sub-contracting arrangement.
On paper, three separate relationships exist: introducer to solicitor, solicitor to IP, IP to client. In practice, the money starts and ends with the same two parties as a direct referral fee would have done. The solicitor's invoice is the mechanism, not the substance.
Why the Code looks at substance, not the payment route
The Insolvency Code of Ethics, which IPs are bound by as regulated professionals, and the SRA's own rules for solicitors both apply a substance-over-form test to fee arrangements. A payment is assessed by what it is for and who ultimately benefits, not by the paperwork used to move it.
Routing a payment through a third party — a solicitor, a consultancy, or any intermediary — does not change its character if the economic effect matches a direct referral fee for insolvency work. Regulators, and any court asked to look at the arrangement later, will trace the money back to its origin and its destination.
This is the same principle used across regulated UK professions to catch disguised remuneration. A firm cannot rename a payment to move it outside a rule written to capture exactly that payment. The Insolvency Act 1986, section 164, makes it an offence to give or accept any gift or consideration as an inducement for a liquidator's appointment — the statutory backbone behind why disguised referral arrangements are treated so seriously.
What regulators actually examine
- Whether the solicitor's fee is proportionate to genuine work actually carried out.
- Whether a "consultancy" or sub-contracting fee tracks case volume or case value rather than hours worked.
- Whether the introducer had an existing referral pattern with the IP before the solicitor was added to the chain.
- Whether the arrangement was disclosed to the client at the point of appointment.
Self-interest threat still exists and cannot be safeguarded away
Referral fees are restricted in insolvency work because of a self-interest threat — a risk that the IP's independence is compromised by a financial incentive tied to who introduced the case, rather than to doing the job properly for creditors and the company.
Adding a solicitor into the payment chain does nothing to remove that threat. The IP still knows, or can reasonably work out, that a payment is flowing back to the source of their instructions. The self-interest threat comes from the economic reality of the arrangement, not from which party issues the invoice.
Some firms argue that because the solicitor is a separate regulated entity, a safeguard exists. It does not. A genuine safeguard reduces or removes a threat to independence. Inserting an extra invoice into a circular payment does neither — it simply obscures the threat from anyone reviewing the file at a glance.
Regulatory and reputational consequences if unpicked
If a regulator, administrator, liquidator or court later examines the arrangement, the consequences can affect both the IP and the solicitor:
- Regulatory investigation — the SRA and the IP's authorising body can both open a conduct investigation once a disguised payment is identified.
- Fee challenge — creditors or a subsequent office-holder can challenge the IP's remuneration as improperly influenced, putting fees at risk of being reduced or repaid.
- Wider referral exposure — an introducer's other case referrals can come under scrutiny once one arrangement is found to be a workaround rather than a genuine engagement.
- Reputational damage — insolvency and legal work both depend on trust in independence, and a finding of disguised referral fees is difficult to recover from professionally.
None of this requires deliberate fraud to be established. A pattern of invoices that do not match genuine work, combined with money flowing back to an introducer, is often enough on its own to trigger scrutiny.
What a genuinely arm's-length introduction looks like instead
A compliant introduction relationship is straightforward to describe, precisely because there is nothing to disguise. The usual features are:
- No fee tied to appointment. The introducer is not paid because a case they sent resulted in the IP or solicitor being appointed.
- Any fee that does exist is for a genuine, separately priced service — for example, marketing or lead-generation work priced on its own terms, disclosed to the client, and not contingent on which practitioner is ultimately instructed.
- Clear disclosure. Any commercial relationship between introducer, solicitor and IP is set out plainly to the client, not buried in a side letter.
- Independent choice for the client. The director or company retains a genuine choice of practitioner rather than being funnelled to one firm because of a payment arrangement.
This is the model behind Harbourfirst's own introduction service: we connect directors and firms with regulated insolvency practitioners and solicitors on a commission basis that is disclosed and structured to sit outside appointment-linked referral fees, rather than dressed up as something else. For the underlying legal position, see our guides on Are Referral Fees Legal in the UK? and the SRA Referral Fees Rules for Solicitors.
Firms weighing up whether a specific fee structure is workable should also read Can Insolvency Practitioners Pay Referral Fees?, which sets out the boundaries IPs operate within, including the authorisation and conduct standards described in gov.uk guidance on becoming and remaining an insolvency practitioner.
Frequently asked questions
Can a solicitor lawfully be paid for genuine disbursements in an insolvency case?
Yes. Paying a solicitor for real disbursements — court fees, Land Registry searches, statutory advertising in The Gazette — is ordinary practice and unrelated to referral fee rules. The issue only arises when a "fee" is actually a disguised payment for the introduction itself.
Is sub-contracting legal work to a solicitor always a problem?
No. Genuine sub-contracting, priced fairly for real work carried out, is normal. It becomes a problem when the amount paid tracks the value or volume of cases introduced rather than the work actually done.
What is the "R340.4 workaround" people refer to?
It is shorthand some introducers use for exactly this kind of scheme — restructuring a referral fee to appear as a legal fee so it looks separate from the restriction on IP self-interest threats. Renaming the payment does not change how a regulator will assess it.
Who investigates a suspected disguised referral fee arrangement?
The SRA can investigate a solicitor's conduct, and the IP's own authorising body can investigate the practitioner. A creditor, administrator or liquidator can also raise the arrangement as part of a fee challenge in an existing case.
Does using a solicitor as an intermediary remove the self-interest threat entirely?
No. The threat exists because of the economic link between the introducer and the appointment, not because of which party holds the money at any given moment. An intermediary step does not remove that link.
This article is general information, not legal, financial or insolvency advice, and firms should speak to a regulated specialist about their own referral arrangements.
If you would like to understand how an introduction arrangement could be structured compliantly, Harbourfirst can introduce you to a regulated insolvency practitioner or solicitor — start an enquiry.