Law Society condemns SRA’s indemnity and compensation fund reforms

Law Society: Prices may go down fractionally

The Law Society has launched a fierce attack on the second attempt by the Solicitors Regulation Authority (SRA) to reduce the indemnity insurance and compensation fund requirements for solicitors.

The society opposed all the main proposals, including a new £500,000 minimum limit for compulsory indemnity cover, and warned that restrictions on compensation awards could be unlawful.

On conveyancing, the society said in its response to the SRA consultation that having a minimum cover limit of £1m for conveyancers would add an “additional layer of complexity” into the system.

It said the Court of Appeal’s recent decision in Dreamvar, which “effectively made solicitors guarantors of the genuineness” of transactions, demonstrated the value of the current professional indemnity insurance (PII) system.

“If the PII regime does not maintain high and consistent levels of cover, then it will increase the cost of conveyancing transactions, as it will become necessary to ask the other side for evidence of PII cover.

“This would be unfortunate, at a time when the government is seeking to make conveyancing cheaper and faster.”

The society said a £1m limit for conveyancing did not take into account the growth in property prices and solicitor conveyancers could be at a “competitive disadvantage” as the minimum limit for the Council for Licensed Conveyancers was £2m.

The Law Society said that if the current cover limits for indemnity insurance were reduced from £3m for incorporated law firms and £2m for others to £500,000, firms would be forced to buy top-up cover.

“Virtually all existing firms will be unable to safely reduce their existing cover. The overwhelming majority will need to maintain cover at the same level as at present.

“This will be necessary to counteract the heightened risk of aggregation of claims and to take account of claims arising from historic cases. It would be unsafe for firms to reduce cover without extremely strong reason to believe they would not experience high level claims.”

The society predicted that, for most firms, replacing their existing level of cover would more expensive, particularly for sole practitioners and small firms who would be left in a “weak position when negotiating insurance terms on an individual basis rather than having a uniform base level of cover”.

The society attacked the proposed exclusion of claims by financial institutions and other business clients with turnovers of more than £2m, saying this would add “complexity and bureaucracy” and firms would be forced to buy more expensive and less comprehensive top-up cover.

Describing the evidence base for the SRA’s proposals as “unclear, insufficient and incomplete”, the Law Society said it had carried out its own research to test the impact on clients of the SRA’s promised savings of 9% to 17% on indemnity insurance policies.

It claimed that legal fees for common consumer services would drop by no more than 0.4 to 0.8%, for example reducing the cost of a will from £195 to £193.41.

“For those prospective clients for whom cost is a barrier to accessing legal services, how many of them will be able to afford a solicitor if the bill reduces by 0.8%?”

As part of its plan to turn the compensation fund into a ‘hardship scheme’, the SRA proposed that maximum payments should be cut from £2m to £500,000.

The society said the proposal to exclude claims by people living in ‘wealthy households’ with assets of over £250,000, excluding property and pensions, would reduce consumer protection and damage trust in the profession.

Further restrictions would prevent all businesses and charities with turnovers above £2m from claiming, along with barristers and expert witnesses.

The society said it had taken independent legal advice, which suggested the new restrictions on compensation fund awards, particularly the asset test for individuals, may be ultra vires.

“It is not, in our view, within the power of the SRA to change the fundamental basis on which the fund works.

“There is doubt as to whether the underlying rule-making power permits the SRA to impose eligibility requirements based on the identity or attributes of the applicant. This is particularly the case in relation to the asset test for individuals.”

Simon Davis, deputy vice-president of the Law Society, added: “Insurance brokers say these proposals are unlikely to result in lower premiums, so it’s hard to see how clients could possibly benefit, but it’s easy to see how they might end up paying a very high price for the fall in insurance protection.

“No other profession in the UK today offers their clients such comprehensive or robust protection. This backstop is key to public trust in solicitors and the legal sector, which in turn underpins the rule of law.”

The consultation closes on Friday.

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