LSB declines to produce the “right” answer on indemnity insurance

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25 July 2016

Neil Buckley

Buckley: need for “evidence-based decisions”

The Legal Services Board (LSB) has shied away from recommending a single solution which all the legal regulators should follow on indemnity insurance.

Publishing the findings of its review of restrictions on choice of insurer in the legal services market, the LSB instead called on the regulators to work more closely together on the issue, where it said “much more is possible”.

Despite the LSB’s preference for open market solutions, the review was noticeably positive about the Bar Mutual Insurance Fund (BMIF), which has been criticised by some barristers for taking advantage of its position as monopoly provider.

The LSB said “media reports indicate that some practitioners clearly find insurance via the BMIF attractive compared to alternatives”.

The review went on: “This may be one explanation why most BSB -egulated entities (who have a choice of provider) have continued to use the BMIF. For the BSB, this may be a reason why practitioners seek authorisation to practice from it, rather than another approved regulator.”

The LSB also argued that “in theory” a sole provider of indemnity insurance was in a better position to report suspected fraud by policyholders.

“For example, a sole insurer bearing cost in any event may act to remove the practitioner from the market, whereas a commercial insurer might have an incentive to try to ‘off-load’ long-term risk to a competitor at the end of the insurance policy.

“Costs of around £3.7m in 2008/09 were reported as arising due to misalignment of incentives on supplying information to the SRA about dishonest firms.”

The LSB said that regulators had “reached different conclusions” on the need for intervention in the market, and restriction on choice could be a “valid decision”, with a variety of ways in which it could be imposed.

The review said that any regulator with an “outlying policy” would no doubt “wish to challenge itself to determine if consistency may be appropriate or if its regulated community is so different from those of other approved regulators as to require a restriction on choice”.

The LSB went on: “The starting point for analysis should be that restrictions on choice in the form of regulatory requirements need to be justified. This means considering the need for regulatory intervention from first principles.

“This requires evidence-based decisions on whether there is a market failure that necessitates action and, if so, adopting the least burdensome response from among those possible. This applies equally to new and existing arrangements.”

Neil Buckley, chief executive of the LSB, added: “Various arguments have been made in favour of different models for delivering PII, such as an open market, the use of a master policy or the creation of a mutual fund.

“With this review we are not looking to specify the ‘right’ answer for any regulator. Instead this review seeks to provide the basis and tools for approved regulators to make evidence-based decisions in this area that reflect their duties under the Legal Services Act.”

Catherine Dixon, chief executive of the Law Society, said the society backed the SRA’s open market model for the supply of indemnity insurance, which allowed firms to choose from more than 40 providers, offering “comprehensive indemnity to solicitors, and unrivalled protection and redress for clients”.

In a dig at the SRA’s plans to rewrite the handbook and allow solicitors to work in unregulated law firms, she said this could result in solicitors providing advice to the public without indemnity insurance cover.

“We are gravely concerned because if these are accepted there will be a significantly impact on client protection and the standing of the solicitor profession, which is not in the public interest.”

She added that the regulator’s plans to waive the run-off requirements for SRA firms wanting to switch regulator “again have the potential to weaken indemnity protections resulting in clients and solicitors being put at risk.”

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