Consumer panel calls for radical reform of financial protection arrangements
Davies: status quo is expensive for lawyers
A single scheme joining up professional indemnity insurance and compensation funds across the whole legal services market – including unregulated providers – should be actively explored, the Legal Services Consumer Panel has recommended.
It also encouraged frontline regulators to explore options to reduce the need for lawyers to hold client money – such as the escrow scheme developed by the Bar Council – but “firmly rejected” any suggestion that cover should become voluntary and consumers given the option of buying insurance themselves.
It said this would unfairly transfer risk to consumers and could prove counterproductive – clients would reject firms who did not self-insure, while some consumers may risk not taking out insurance.
The panel also recognised that escrow accounts are unlikely to work in all circumstances. For example where a lawyer is managing the affairs of someone who is ill or incapacitated, the possibilities of an escrow account will be limited since it is the lawyer giving consent for the money to be paid out.
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The report was published in response to a Legal Services Board request for advice on the current financial protection arrangements, and concluded that while they cover the key risks consumers face when buying legal services, there are concerns and areas for improvement.
These include scenarios where consumers may unfairly lose out due to gaps in coverage (such as claim aggregation), disputed territory between regulators and insurers, and the discretionary nature of compensation schemes without published decision-making criteria. In addition, the protections can be “difficult to access, fragmented and lack transparency”.
A single scheme would work by setting minimum terms and conditions for all lawyers’ indemnity insurance, and deliver a single compensation fund.
“This could have a number of advantages, including a single access point for consumers, potentially lower costs for lawyers (as administrative costs would no longer be duplicated), risk-based pricing unaffected by professional title, and a single point for data collection and analysis. Such an arrangement could also provide the possibility for unregulated providers to come under the scheme if they wanted to.”
The report was accompanied by the latest ‘think-piece’ in the panel’s ‘Consumer Challenge’ series, discussing the wider issue of how risk and responsibility should be divided between consumers and providers.
This said: “For a range of reasons linked to public attitudes towards the legal system, the vulnerability of clients and third parties, the nature of the legal services market and a lack of information about providers, our analysis is that consumers are currently poorly placed to manage many of the risks of using legal services.
“This situation justifies a high level of regulation, but at the same time there should be efforts to reduce consumer vulnerability and so make it easier for people to make better choices and protect their own interests when using legal services.”
The panel argued that all legal activities should be regulated at least to the extent that all providers should fall within the Legal Ombudsman’s jurisdiction. “It seems unfair to push risk of choosing legal services on to consumers yet not give them a route to redress if something goes wrong.
“Likewise, consumers’ inability to check the technical quality of work underpins the greater emphasis we place than some other stakeholders on the need to prevent detriment wherever possible through entry standards and periodic revalidation.
“However, we see no inconsistency between our wish for minimum consumer protections set at a high level and competition. The market should be open to all types of provider who can meet such standards rather than only the traditional professions as before. In fact, since consumers expect these protections to be in place, putting in place the level of regulation that consumers want to see should support a diverse market place.
“Any transfer of risk to consumers should be a gradual process and only follow when there is evidence that consumers are more empowered.”
Panel chair Elisabeth Davies: “We think the same level of protection [as now] could be delivered at a lower cost if the different regimes were united under a single scheme covering all lawyers. The status quo is expensive for lawyers and consumers ultimately pay the price. The government has signalled it wants to simplify the regulatory system – this is an obvious candidate and could be a win-win for consumers and lawyers.”
Tags: compensation fund, Legal Services Consumer Panel, professional indemnity insurance
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