The Law Society has said it has “no objection in principle” to the Solicitors Indemnity Fund (SIF) being replaced by an in-house alternative run by the Solicitors Regulation Authority (SRA).
However, the society was strongly opposed to the SRA’s suggestion that businesses, charities or trusts with income or assets of over £2m should not be able to make claims on the successor to SIF.
It warned that this could result in mortgage lenders not only allowing smaller law firms on their panels.
The SIF protects solicitors against claims made after the six-year run-off period following closure of a law firm. It was first meant to close in 2017 but has been repeatedly delayed over concerns that firm owners faced an uphill struggle to find alternative cover.
The SRA finally acknowledged earlier this month that there was “some evidence” of risks to “a small number of consumers” if the task of protecting solicitors against claims made after the six-year period was left to the open market.
Instead, the regulator said “a new consumer protection arrangement within the SRA” was likely to be the most cost-effective solution when SIF finally closes in September 2023.
Responding to the discussion paper, the Law Society, which has argued for retention of SIF, said the “primary focus” must on the continuation of post six-year run-off cover, with the “full range of consumer protections” currently provided.
“Therefore, the society has no objection in principle to supporting an indemnity fund that is managed by the SRA, provided that the scheme is established with transparent governance to provide the same level and scope of protection as currently provided by the SIF.”
If the SRA produced “strong evidence” that an in-house alternative could provide the same protection at lower cost, that would be “all the better”.
The SRA’s discussion paper proposed options on changes to the rules to restrict claims to any future SIF or SIF replacement.
One would be blocking claims from businesses, charities or trusts with income or assets of over £2m, in a similar approach to that taken by the SRA Compensation Fund. Another would be following the compensation fund in no longer covering claimant costs.
The Law Society was strongly opposed to both. It warned that the first “could negatively affect the behaviour of large corporate clients with undesirable consequences for the broader market for legal services”.
For example, mortgage lender panels “might refuse access to all but the larger firms which are considered to be at an acceptably low risk of closure without a successor practice”.
If this were to happen, small and medium-sized law firms “could be forced out of conveyancing work”, limiting access to legal services, undermining competition and discouraging an independent, strong, and diverse legal profession – regulatory objectives the SRA is bound to follow.
On costs, Chancery Lane said it “would not support any changes or exclusions that may deter those with valid claims from seeking compensation”, given the “particular problems that consumers face in pursuing late-arising claims and the potential for higher up-front costs”.
I Stephanie Boyce, president of the Law Society, said: “In principle, we could support an SRA-run consumer protection fund, but only if it provided the same like-for-like protection as SIF.”
Ms Boyce said any replacement for SIF must continue to run as an indemnity scheme, funded through a mandatory levy on firms.
She said analysis by the SRA suggested that this would cost around £240 per firm per year, “which need not have any effect on the price of legal services for consumers”.
Ms Boyce said any residual funds from SIF should be “ring-fenced” for post six-year run-off claims.
“Consumers trust their solicitor is adequately and appropriately insured, and that they will be compensated for any losses on the rare occasion something goes wrong. It is of paramount importance that trust and confidence are maintained.”