The Solicitors Regulation Authority (SRA) needs to consider alternatives to intervening in failing law firms, the Law Society has said, while accepting the “emergency” need for the regulator to dip into the Compensation Fund to pay for the unexpectedly high cost of interventions this year.
The overall cost of interventions in 2013 is currently estimated at £7m, against a budget of £1.3m, plus more than £1.8m for the cost of in-house intervention agents and archiving.
In its response to an SRA consultation on its plans to use money in the Compensation Fund to cover it, the society said this was preferable to a levy on the profession, but should not be a long-term policy.
The SRA is in any case planning a full review of compensation arrangements next year.
Intervention – which “may impact on a large number of ‘innocent’ parties, including clients and employees” – should only be necessary in a small number of cases, the society said, arguing that there are alternatives to intervention that could cut costs and improve outcomes. These include appointing a client account manager to ensure client funds are protected while a firm is wound down.
It added: “Further work is needed to find the appropriate regulatory response to the new phenomenon where a firm fails for purely financial reasons. In these situations, it is often preferable for the SRA to work with the firm’s administrators, and, if all parties agree on the appropriate course of action, act as a facilitator, rather than threatening intervention or becoming directly involved in the process.”
Law Society chief executive Des Hudson said: “The Compensation Fund exists primarily to make good any deficiency in client money and to maintain public protection in the event of solicitor dishonesty. This does not necessarily align with the purposes for which intervention costs may be incurred.
“Every effort should be made by the SRA to reduce the likely overspend this year on interventions. There is significant value in keeping the cost of ‘last resort’ compensation and the cost of enforcement separate. Although the money comes from the ‘same pot’ in the end, the two aims are different and it would be unfortunate if the two became muddled as a matter of course.
“It is crucial that the SRA should ensure that it is accurately forecasting future costs so that there is proper transparency about the money that is being spent.”