Evans: Danger of SRA rules creating an unnecessary burden
The national Law Society and Birmingham Law Society have argued against rules planned by the Solicitors Regulation Authority (SRA) for law firms which use litigation funding, particularly for consumer claims.
However, the Legal Services Consumer Panel (LSCP) has enthusiastically supported the proposals, calling for the “strongest practicable version of the requirements” to be imposed on firms as soon as possible.
Launched in July, the proposed new rules [1] would require all firms using funding to provide written confirmation to lenders and clients of their duties to maintain independence, act in the clients’ best interests and not disclose confidential information without client consent.
Those handling consumer claims would also have to provide clients with a funding information document in a prescribed form, notify the SRA that they were arranging or using funding, keep risk assessments and make them available to the SRA on request, and in some cases put in place an ‘orderly closure plan’ because of the risk involved.
Responding to the consultation, the Law Society said the SRA should make “better use of existing regulatory powers and guidance, before imposing additional requirements on solicitors”.
On the proposed rules for all firms, the society said its “preference” would be for the SRA “to focus on guidance, supervision and enforcement of existing requirements wherever possible, rather than creating a parallel set of funding-specific conduct rules”.
The society opposed the plans for law firms handling consumer claims, saying it had “stronger reservations” about the proposal for orderly closure plans than any other.
The SRA’s proposals would apply only to firms instructed by 500 or more claimants, where the funding provided exceeded 30% of turnover or involved law firm staff or managers providing security.
The response said law firms already had obligations to monitor financial stability, notify the SRA of serious financial difficulty and effect an orderly wind-down, and the SRA’s consultation “did not fully explain why a new mandatory closure-planning requirement is needed in addition”.
Law Society president Mark Evans commented: “We support the SRA’s efforts to improve transparency and consumer protection, but any new requirements must target genuine risks rather than create unnecessary burden.”
In its response, the Birmingham Law Society said its professional regulation committee viewed the existing rules as sufficient and said there was “no need for any new rules”, though further guidance was needed.
The society commented on the orderly closure plan: “The security for any funder should be that the funds are held in client bank account. There should be no circumstances where a third-party litigation funder has security over the assets of the firm.
“This demonstrates a catastrophic failure of the regulator to enforce the most important rules to protect the public and the profession.
In other responses, Martyn Day, co-president of the Collective Redress Lawyers Association, said that only if the SRA identified “problematic practices where there is a greater risk of consumer harm should more burdensome obligations such as notification, prescribed risk assessments or orderly closure planning be imposed on that law firm”.
He added: “It can’t be the case that one bad apple, such as the collapse of SSB group, spoils the whole barrel.”
However, there was a very different response from Tom Hayhoe, chair of the LSCP.
He said it was “essential that the SRA proceeds now with the strongest practicable version of the requirements it can impose on the solicitors and firms within its own regulatory remit, rather than waiting for statutory reform of funders that has no confirmed date”.
Agreeing with all the SRA’s proposals, Mr Hayhoe described the orderly closure plan as “the single proposal in this consultation the panel considers most directly justified by recent events”.
He went on: “SSB Group’s collapse left thousands of clients with little warning, facing uncertainty about their claims and, in many cases, personal liability for costs they had been told they would never have to pay.
“A requirement that relevant firms plan in advance for an orderly closure, covering client communication, safeguarding client money, transfer of live files and financial liabilities, is a direct and proportionate response to a harm that has already materialised at scale, not a speculative or precautionary measure.”
Mr Hayhoe drew comparisons with the Financial Conduct Authority’s regulation of claims management companies, “a sector operating in a closely related part of the consumer claims market, which already imposes a best interest’s duty, pre-contract information requirements and prudential safeguards of the kind proposed here”.