Compensation Fund cuts would be “devastating”

Law Society: Reform would send wrong message to consumers

Cutting the maximum size of Compensation Fund awards from £2m to £500,000 could have a “devastating” impact on “unlucky claimants”, the Law Society has warned.

While praising the Solicitors Regulation Authority (SRA) for abandoning some of its most “damaging proposals” for the fund, the society argued strongly for further major changes to be made.

The Compensation Fund pays grants to people who have suffered financial hardship because of a solicitor’s dishonesty or failure to account for client money where not covered by insurance.

The SRA consulted on a sweeping set of changes to the fund in 2018, as part of wide-ranging plans to reform professional indemnity insurance.

While the regulator ditched its insurance reforms, including cutting minimum cover from £2m to £500,000, at the end of last year, it retained many of its key proposals for the Compensation Fund when it launched a fresh consultation in January.

The society said that the number of applications to the fund likely to be affected by the £500,000 cap was “relatively low”, since the average size of grants was only £20,000.

“Nevertheless, as a matter of principle, people who have been defrauded by their solicitor should be eligible to apply for compensation, regardless of their means or a perception of their deservedness.

“At a time when other professional compensation schemes, such as the Financial Ombudsman Service, are increasing their maximum pay-outs, this would send entirely the wrong message to consumers, and criticism in the press would further undermine public confidence in the profession, and legal services more generally.”

The society said reducing the cap could also have a negative impact on diversity in the profession.

For example, the society predicted that with many estates falling outside the limit, charities would direct would-be donors to larger law firms for will writing “to avoid the danger of legacies going astray”.

If they did so, “this would be at the expense of smaller firms, which would have a disproportionate effect on BAME solicitors, as they are over-represented in this sector, relative to the rest of the profession”.

The society strongly attacked the SRA’s plan to stop barristers or expert witnesses claiming unpaid fees from the fund.

“Imagine a scenario in which a client is on trial for murder, but their solicitor cannot secure the services of the best barristers or expert witnesses because of fears about what might happen in the event that they are not paid. This reform could have serious negative implications for access to justice.”

The society was equally opposed to the proposal to prevent third parties from claiming on the fund.

“For example, limiting applications to those who received the legal services would exclude buyers in conveyancing transactions who have lost money because of the dishonesty of their seller’s solicitor (or vice versa), as well as other third parties who suffered losses because of a solicitor’s dishonesty or failure to account.”

The Law Society supported the removal of hardship tests for individuals, small businesses and charities, and the SRA using its discretion on “rare occasions” to refuse grants where it considered the loss would be compensated elsewhere.

However, it criticised the fund’s administration costs, which amounted to 58% of the grants paid in 2018 and 77% the year before, and said use of the fund to cover intervention costs were “one of the most significant drains” on its resources.

The Legal Services Consumer Panel strongly attacked the SRA’s plans last month, singling out for criticism its use of the fund to cover the cost of closing down law firms.

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