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Law Society: SRA has “no coherent vision” for insurance reform


Inadequate cover: just flagging abolition of the ARP could damage market, says society

Excluding claims by financial institutions from compulsory professional indemnity insurance (PII) cover will harm consumers and smaller law firms, cut access to justice and do little to reduce conveyancing claims, the Law Society has said.

In a damning response to Solicitors Regulation Authority (SRA) plans for future client protection arrangements [2], which it said had “no coherent vision”, the society predicted that the measure would increase the cost of PII premiums and lead to the further reduction of lenders’ panels. This would have “an adverse effect on the diversity of the legal profession”, it claimed.

The SRA argues, among other things, that excluding lender’s claims from PII would reduce the number of firms “dabbling” in conveyancing work and reduce PII premiums for non-conveyancers. It suggests that while there may be negative effects on diversity, these would be balanced by the positive effects.

In its response, the society also slams two other proposals for 2011: to make insurers’ reporting obligations mandatory and to reduce the time firms spend in the assigned risks pool (ARP) from 12 to six months.

The society agreed with just one proposal – to remove the single PII renewal date. Even then it predicted a delay before benefits emerged and that there might be cost implications for the SRA in monitoring a variable renewal system.

On mandatory reporting, the society said the measure would be ineffective without proper enforcement and the issue should be dealt with more firmly by the SRA. “This is a high risk area for the profession,” it said.

Reducing the time firms spend in the ARP “simply hastens firms’ closure without alleviating ARP losses”, the society argues, since claims would still have to be met during the run-off period. The society has published its own proposals for a temporary extension of cover [3] to replace the pooled liability of the ARP.

Also under fire from the society are SRA proposals for next year, which include extending the exclusion from mandatory PII to corporate clients and abolishing the ARP altogether from October 2012. If a firm could not obtain open market insurance, it would have to close and the liability for run-off cover would either fall on the firm’s existing insurer or on the profession.

The society “strongly opposes” the abolition of the ARP “without introducing an alternative safety net”. The move “would impact severely on the financial viability of many firms, particularly small ones, and is not a balanced or proportionate response”. Even flagging the possible abolition of the ARP in 2012 could mean insurers leave the market this year or delay their entry until 2012, it adds.

In conclusion, the society says: “On balance the Law Society considers that the SRA’s proposals have no coherent vision and fail to address the underlying cause of conveyancing claims which, given the cyclical nature of the insurance market, will ultimately create further problems and unintended consequences. A proportionate and targeted response… would focus on the areas of regulatory failure and develop specific measures to better regulate the market.”