Huge hike in compensation fund levy to go ahead


Philip: Fund is a vital safety net

The Solicitors Regulation Authority (SRA) is pressing ahead with a huge hike in the compensation fund levy in the wake of the spiralling cost of law firm failures.

Following consultation, the contribution for individual solicitors, which is usually paid by their firms, will go from £30 to £90 and for law firms that hold client money from £660 to £2,220.

The SRA said the hike was the result of “exceptional levels of intervention costs and compensation claims over the previous financial year”.

The proposed individual fee returns to the same level as in 2018/19, when the firm fee was £1,680. Though the number of solicitors has increased since then, the number of firms has fallen.

The SRA 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.

There were only 18 responses to the consultation and, according to a paper before the recent meeting of the SRA’s main board, those that mentioned the increase highlighted the greater impact on small firms and suggested that the basis for splitting the contributions between firms and individuals should be reconsidered.

The paper said: “The basis of how contributions are collected is being considered as part of the ongoing consumer protection work and we expect to consult on possible changes as that work progresses…

“Any alternative approach to distributing contributions would inevitably create winners and losers and the impact on all groups would need to be fully considered.”

The Law Society’s response argued that the SRA had not done enough to justify the increases, saying it had failed to explain its thinking more clearly, including the alternatives that were considered.

“This will of course be included in our application to the Legal Services Board for approval of the contributions,” the SRA responded.

Its equality impact assessment acknowledged the potential financial impact on certain groups, such as smaller firms where ethnic minority solicitors and those from lower socio-economic backgrounds are over-represented, but the paper said the increase was “necessary and proportionate” given the importance of maintaining the fund.

The SRA said it had taken steps to limit the increases in the coming year, including extending the period over which to rebuild the fund’s reserves, and negotiating a £10m banking facility which could be used in the event of further large interventions (the costs of interventions are recovered from the fund).

Without these measures, it said, contributions would need to have risen by almost twice the amount.

Chief executive Paul Philip said: “The fund plays a critical role in protecting the public and maintaining trust in the profession. We have steadily reduced contributions to the fund over the last five years, but this increase is needed due to the unprecedented level of recent claims on the back of large interventions.

“It’s vital that there is enough money in the fund to continue to provide a safety net for consumers, but we recognise the profession’s concerns about a large increase. So we have done all we can to keep that rise down next year.”

The SRA also confirmed that it would not be seeking more from the profession for its other costs. It is looking to raise £70.2m from practising fees for 2024/25, up 3.8% from £67.6m. This was the figure for inflation in March.

Increasing solicitor numbers mean that the SRA’s share of the individual practising certificate fee will remain unchanged at £162 as part of an overall unchanged figure of £307, indicating that the Law Society’s proposed £4.20 increase in its share of the money is not going ahead.

Firm fees will also be set in line with last year, meaning any increase would only follow from an increase in a firm’s turnover.

Mr Philip first warned solicitors to brace for a “radical” increase in their contributions to the fund following the interventions into Axiom Ince, Metamorph and Kingly.

In all, the regulator carried out 65 interventions during 2022/23, more than double the number in the previous year, with two in particular – Metamorph and Axiom Ince – generating “significant costs and payments to former clients of the firms”. Kingly was in 2020.

This turned a surplus of £3.6m in 2022 to a deficit of £29m in 2023. As a result, the fund’s reserves have fallen to £25m.




    Readers Comments

  • Arthur Michael Robinson says:

    Should not the hike in fees be based upon turnover or number of employees?
    Should not the SRA be saying that in future mergers of a certain type or if potential impact will have to be approved by them?


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