The Solicitors Regulation Authority (SRA) has decided against making an unprecedented mid-year call on the profession to bolster its Compensation Fund in wake of Axiom Ince’s collapse.
This is despite already receiving claims worth £33m, with the fund currently holding reserves of £30m.
The SRA said it has so far only paid out a limited number of emergency claims against strict criteria, such as where there was a risk of homelessness or imminent insolvency, or if a client was under a contractual obligation to complete on a domestic property purchase.
It has instead laid out how it will prioritise claims in a way to maintain the fund’s financial solvency.
In an announcement today, the regulator said: “By taking this prioritisation approach and managing the cash flow demands on the fund, the SRA will not be calling on solicitors to make an in-year contribution at this point, but will keep this under review in the light of any further interventions or other unforeseen events.”
However, an increase in the annual levy looks very likely. As part of their practising fees every October, law firms currently pay £660 towards the fund, plus £30 per solicitor.
Last month, the SRA warned solicitors to brace for a “radical” increase in these figures following the interventions into Axiom Ince as well as two other consolidators, Metamorph and Kingly. These are the three largest interventions in the profession’s history.
The compensation fund is a discretionary fund of last resort that can pay out up to £2m where a solicitor has stolen or not accounted for client money – and it is not covered by the firm’s professional indemnity insurance – or did not have insurance in place.
SRA chief executive Paul Philip said last month that it was too early to say how much of the £64m then thought to be taken from Axiom’s client account would fall on the fund. Some would be covered by the firm’s insurance, for example, while SRA rules prevent corporate clients from claiming.
Today’s announcement said: “A claim against Axiom Ince’s professional indemnity insurance is under way and the level of funds which may be recovered from the existing freezing order on assets obtained by the firm is still to be determined.
“If funds are recovered from the insurance claim or from the sale of frozen assets, then these will be used to replenish the compensation fund.”
It also confirmed that the SRA has decided not to engage a rule that would allow it to impose a £5m overall cap on claims from an intervention as a method of protecting the solvency of the fund.
“The idea of a cap was introduced some years ago and in a different context – that of investment scheme fraud. It was against that backdrop that the cap was set at a fixed level of £5m, which the SRA cannot raise or lower…
“In the case of Axiom, the scale of consumer loss, were the cap to be applied, would be too large, and would lead to an unacceptable loss in public confidence in solicitors.
“However, by adopting a careful prioritisation approach to the settling of claims, the aim is to manage the short-term solvency of the fund and avoid extreme consumer detriment.”
The criteria for the emergency payments have been developed into detailed guidance for clients that explains the prioritisation process and provides an indication of timescales.
Next month’s meeting of the SRA board will consider a “medium-term work programme reviewing its client protection and compensation fund arrangements and whether they remain fit for purpose for the future”.
Law Society chief executive Ian Jeffery welcomed the decision not to make an in-year call on solicitors.
“We maintain that the solicitor profession must be consulted before any decision is made by the SRA on its future approach to such exceptional compensation questions, given that our members would be required to pay for it.”
Earlier this month, the Serious Fraud Office arrested seven people and carried out dawn raids across nine sites, as it announced the launch of a criminal investigation into Axiom Ince, while the SRA issued a detailed defence of its actions in overseeing the firm.