The Legal Services Consumer Panel (LSCP) has attacked Solicitors Regulation Authority (SRA) plans to reform the Compensation Fund, saying it should instead stop draining the fund to pay the cost of closing down law firms.
A core recommendation is to cut maximum Compensation Fund awards from £2m to £500,000 to help reduce the cost of the scheme. The panel opposed all the main proposals, which it described as “poorly designed”.
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.
Responding to the regulator’s consultation, Sarah Chambers, chair of the LSCP, said the SRA “only began taking money from the Compensation Fund to pay for interventions in 2013”.
Between 2012 and 2016, the fund’s outgoings on interventions rose from just over 2% to almost 28%, while its expenditure on grants to consumers fell from over 80% to just under 55%.
“Where interventions must occur, their cost should not be borne by the Compensation Fund. We do not know the breakdown of the costs of interventions, because this information is not made available by the SRA.
“It is our assumption that the bulk of the intervention costs are paid to other professionals contracted to fulfil the practicalities of closing the mismanaged firm.
“What is certain from the data available is that if the cost of interventions is removed or reduced, a substantial drain on the Compensation Fund would be reduced.”
The SRA said that, under the new scheme, awards of more than £500,000 could be paid “in the public interest on an exceptional case-by-case basis”, while it would apply a total cap of £5m to claims arising from a “single or connected event”, such as the failure of a particular investment scheme.
Ms Chambers described as “worrying” that one of the SRA’s drivers for change was the need to “mitigate against high cost claims” from fraudulent or reckless investment schemes.
“The SRA needs to tackle investment scams or misconduct with its supervisory and enforcement activities, not by cutting off compensation for wrongdoing.
“Tackling the activities that are against the code of conduct or patently dishonest is a core function of regulation.
“It is an abdication of this responsibility to attempt to reduce compensation payments to consumers who have suffered financial loss as a result of misconduct or dishonesty.
“And it would be a double injustice to be penalised by the very regulator who failed to prevent the wrongdoing.”
Ms Chambers said a cap of £500,000 would be inadequate for probate and conveyancing clients and “completely to fail to address the potential needs of a significant number of consumers”.
She said the panel was “strongly against” the proposal to exclude claims on the fund by third parties where there was proof of financial loss, describing it as “grossly unfair” and warning that it could erode consumer confidence.
Ms Chambers said a cap on multiple claims could mean that where there were “very large losses”, individual claims might not be met. Nor did the panel agree with the “arbitrary cap” of £5m proposed for claims arising from the same event.
On the proposed reduction of the individual limit for claims from £2m to £500,000, Ms Chambers said it was “disappointing” that the SRA had focused on regulators which had the £500,000 limit, like CILEx Regulation, and not on the Council for Licensed Conveyancers, which had none.
Ms Chambers said that just as with the SRA’s original consultation on Compensation Fund payments in 2018, it may have agreed with the reasons for reassessing arrangements, but it found “the means to achieving the objectives wanting”.
She added: “Consumers are being asked to relinquish significant protection without any benefits.
“We are not convinced that a reduction in the cost of legal services as a result of these changes would be passed on to consumers. We are not even convinced it will materialise.”