SRA goes ahead with £500,000 PII limit but postpones other reforms

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3 July 2014


The Cube

The SRA: pressing ahead with indemnity cover cut

The Solicitors Regulation Authority has decided to go ahead with cutting the minimum compulsory cover for indemnity insurance from £2m to £500,000, despite strong opposition from the Law Society.

It has also decided, at its board meeting in Birmingham yesterday, to introduce new eligibility requirements for those wanting to make claims on the Compensation Fund.

This means applications will only be considered from individuals, small businesses and charities with annual incomes of less than £2m, and trusts will a value of less than £2m.

However, plans to impose the same eligibility criteria on those wanting to claim on solicitors’ compulsory indemnity insurance, and to cut run-off cover from six to three years, have been postponed until 2015 to allow for the completion of a wider review of indemnity insurance arrangements.

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A decision on whether to abolish the requirements on firms to produce annual accountants’ reports was deferred until the next meeting of the SRA board so as to allow for more time considering the issue.

The indemnity reforms in particular have attracted widespread criticism from the Council of Mortgage Lenders, the Legal Services Consumer Panel, and certain indemnity insurers, as well as the Law Society.

In a highly unusual move, former society president Linda Lee – who now chairs its regulatory affairs board – was allowed to address the board meeting, where she argued passionately against the whole reform package.

“If we are right, or only partly right, the reputation of all solicitors and firms will suffer,” Ms Lee said. She said all the proposals were interlinked and that any changes to public protection could operate in the way butterflies flapping their wings in Brazil led to tornadoes in Texas.

Ms Lee said not all firms would be able to access top-up cover at the level they required. “We are concerned that consumers will be confused by different levels of cover,” she said.

“We don’t see that there will be a large reduction in the price of premiums. Instead there will be less cover for a very little change in price and the top-up cover could be very expensive. A group of firms could be identified as posing a threat and difficult to do business with, no matter how good they are.”

Ms Lee added that it would be less attractive to do business with sole practices and two-partner firms if the compensation fund protection was reduced.

Marks Stobbs, director of legal policy at the Law Society, attacked the SRA’s reforms in equally strong language, warning that if solicitors reduced their minimum indemnity terms, “lenders will impose their terms which could be higher”. He said this could lead to firms ceasing to offer conveyancing services at all.

Referring to the proposed reduction in run-off cover, one of the measures postponed for next year, he said this could lead to widows and orphans being forced to rely on the compensation fund and “Daily Mail headlines about people being left destitute”.

Paul Marsh, another former president of the Law Society and a past chairman of the Solicitors Indemnity Fund, was the only SRA board member to vote against the cut in minimum cover.

“Minimum terms provide unique protection to consumers, protecting the integrity of the profession,” he said. “I am not satisfied that there is any reliable evidence that this will reduce premium levels.”

He added that one of the biggest causes of complaints against solicitors was that they “rushed into things” without considering the consequences.

Martin Coleman, SRA board member and global head of antitrust and competition at Norton Rose, said in response that the other criticism of solicitors was that “they debate and pontificate”.

Mr Coleman said the issue was where to set the right level of cover. “It seems to me, on the evidence, that £500,000 is right and will cover the vast majority of claims.”

Mr Coleman said the new requirement on law firms, also approved yesterday, to assess the appropriate level of insurance cover they needed, was “very significant”. He added that the impact on insurance premiums could never be absolutely certain, but if the costs were reduced, it should be reflected in the market and if not, “other regulators should be dealing with it”.

Elisabeth Davies, chair of the Legal Services Consumer Panel, described the decision as disappointing. “There were gaps and weaknesses in the evidence and we are not convinced this course of action will lower prices for consumers. In fact, it might mean consumers will lose the current level of protection without gaining anything in return.

“The SRA now needs to focus on the bigger prize: ways to make the system less risky for consumers – for example by looking at alternatives to solicitors holding client money.”

Joanne Staphnill, a senior solicitor at insurance-focused alternative business structure Triton Global, said the change will mean that firms and their insurers “will have a free rein, over and above the new £500,000 minimum, to negotiate over both the level and wording of the PII insurance”.

She explained: “For instance, for insurance above the new £500,000 minimum amount, insurers could potentially seek to remove protections that law firms may have taken for granted until now. In the future, claims could be declined for problems such as late notification, leaving the firm with a potentially substantial uninsured exposure.”

In another decision made by the board, the amount that may be withdrawn from residual client balances and donated to charity without SRA approval will rise from £50 to £500. But decisions on easing the licensing of multi-disciplinary practices and stopping the ‘keeping of the roll’ enquiry as an annual event, which were also consulted on in the spring, will be considered by the board in the autumn.

 

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