The SRA Compensation Fund (SCF) paid out more than £10m to the victims of solicitors’ financial dishonesty last year, a 37% increase on the previous 12 months, new figures have shown.
The news came as the Legal Services Board (LSB) approved the Solicitors Regulation Authority’s (SRA) application to change elements of the scheme after the plan to cut the maximum award from £2m to £500,000 was dropped.
The SCF is a discretionary fund of last resort that pays grants to people who have suffered financial loss because of a solicitor’s dishonesty or failure to account for client money where not covered by indemnity insurance.
All solicitors and firms pay for it – in the 2020/21 practising year, the profession contributed £14.5m.
The SCF’s newly published annual report showed that, in the year to 31 October 2020, grants of £10.3m were made, compared to £7.5m the year before.
The fund received 1,120 claims in 2020 (2019: 1,414) and closed 1,146 (2019: 1,516). At the end of the year there were 637 open claims (2019: 535) with a total claim amount of £84.6m (2019: £79.7m).
The accounts for 2020 showed a deficit for the year of £6m, compared with a surplus of £18m in the previous year – this was expected and was, in fact, smaller than originally anticipated.
The annual report said: “The balance in the fund has been deliberately increased in prior years to allow payment of high value, exceptional claims.
“These claims have been paid later than thought with the majority now expected to be paid during the 2020/21 financial year, reducing the balance on the fund further.”
However, the SCF is still sitting on nearly £61m in reserves and is considered a going concern.
The costs of running the SCF were just shy of £10m, almost all of which are incurred by the SRA and recharged to the fund. Nearly two-thirds of this relates to the costs of intervening in law firms and legal costs incurred by the SRA.
We revealed last month that the SRA had backed down over its controversial plan to cut the maximum award from the SCF from £2m to £500,000.
The decision was facing rejection by the LSB, which issued a warning notice that it was considering refusing permission for the change, along with one that would exclude claims from “large” charities and trusts with assets or annual income of over £2m.
The LSB announced yesterday that it had approved the rest of the application, including the large charities and trusts exclusion.
In its decision notice, it recorded the SRA’s argument that that almost 90% of charities have income of less than £2m. and that payments to those with more have historically been rare.
“The LSB further notes the SRA’s explanation of the ability of larger trusts and charities to have access to the expertise necessary to build the resilience to manage the risk and impact of missing money, and that such charities are more likely to have the knowledge and resources to actively pursue other avenues of redress to recover such money,” wrote chief executive Matthew Hill.
“Overall, we consider that this significantly reduces the risk of potential detriment to the beneficiaries of larger charities and trusts.
“On balance, we further consider that any potential risk of detriment to larger charities and trusts is outweighed by the need for the [rules] to provide consistent and fair outcomes which prioritises those that are most in need.”
Other changes approved include a £5m cap on payments for multiple high-value claims arising from a single or connected event.
The SRA said this would allow it to manage the potential liability to the fund from high-value connected applications arising out of, for example, dubious investment schemes or an intervention into a large solicitors’ practice.
It would also make it easier to maintain more consistent levels of contributions each year and still allow eligible applicants to receive “a reasonable level of redress that compares favourably to other schemes with capping mechanisms”.
Mr Hill said: “We consider that the SRA’s approach appears to be proportionate and driven by the analysis of historic grants and an estimation of the significant impact on contributions to the fund.
“We also note the SRA’s work to reduce the likelihood of solicitors’ participating in [investment] schemes and the actions the SRA has taken against those who have. This should reduce these types of losses arising in the future.
“On balance, we consider that any potential detriment to the minority of consumers who make connected applications for a grant from the fund is outweighed by the benefit of ensuring the fund remains viable for all who most need it.”