Compensation funds could be “wiped out”, panel warns

Chambers: Lack of data

The Legal Services Consumer Panel (LSCP) has warned that interim compensation funds put in place by two of the smaller legal regulators could be quickly “wiped out”.

It also floated the idea of the legal regulators pooling their compensation funds

As we reported last month, CILEx Regulation and IPReg, the Intellectual Property Regulation Board, are having to self-finance their compensation funds after their insurer, Royal Sun Alliance, pulled out of the market earlier this year.

The regulators have both consulted on plans for much less generous interim compensation schemes while longer-term solutions are agreed.

CILEx Regulation said the individual cap on claims would remain at £500,000, but the cap for aggregated claims against the same firm would be cut from £2m to £500,000 and the overall cap on claims reduced from £6m to £1m for the next year.

IPReg is planning to maintain its individual cap of £25,000 per claim, while reducing the aggregate amount for claims against the same practitioner from £225,000 to £100,000, and the total cap on the fund from £2.5m to £100,000.

Responding to their consultations, Sarah Chambers, chair of the LSCP, warned CILEx Regulation that having the same cap for individual and aggregated claims meant that if there was a “high-level loss (that approaches the limit) claimed in the interim period”, that would be the only claim that could be paid.

While the actuary advising CILEx Regulation considered this scenario to be “very unlikely”, Ms Chambers said: “Legal executives offer conveyancing and probate services and due to the high cost of property, especially in London, it is not unforeseeable that one or more high level claims will be received.

“The lack of data presented makes it difficult to judge how many consumers who have a claim are likely to suffer a disadvantage due to the withdrawal of insurance backing to the compensation scheme.

“It also makes it hard to determine whether one legal executive’s dishonesty or failure to carry personal indemnity insurance is more likely to affect just one client or more than one.”

Ms Chambers said there was “no reasoning provided” by CILEx Regulation for not returning to the position before the compensation fund became wholly funded by insurance, when the total cap was set at £2m.

“In the event this is deemed not possible, the panel reiterates that it is not comfortable with the fact that one very large claim could wipe out the entire fund at once.”

Turning to the IPReg plans, Ms Chambers said the “entire value of the proposed fund could be potentially wiped out with a very low number of claims or the equivalent to the maximum claims allowed against one firm”.

The same actuary advised IPReg and regarded this as “very unlikely”, but Ms Chambers said it was important there was “a viable plan for the fund to be replenished should it be depleted”.

She said the fact that legal services relating to a patent or trade mark were delayed may cause “additional loss” to a client, due to time sensitivity.

“The panel wants to ensure that any actuarial advice considers the actual losses a consumer is likely to suffer may extend beyond pure monetary theft, including the theft of the intellectual property which a client is attempting to protect.”

Ms Chambers said that compensation fund coverage “similar to the current level” should be maintained so claims could be covered in all but the most unlikely scenario.

Adjustments to the compensation scheme, even in the interim, should not “unduly prejudice” consumers.

She added that there was a need for the Legal Services Board to undertake a “comprehensive review” of the legal regulators’ compensation fund arrangements.

“The panel is of the view that ideas such as ‘pooling’ funds across the regulators are worth exploring, as doing so may spread the risk and thereby potentially reduce costs, especially if the funds accumulate over time.”

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