The possibility of clients buying ‘top-up’ cover to fill the gaps in compulsory professional indemnity insurance (PII) has been floated by the Legal Services Board (LSB) as it set the scene for a significant shake-up of current financial protection arrangements.
It also saw merit in the idea – supported by the Council for Licensed Conveyancers and Council of Mortgage Lenders – for a single compensation fund across the legal profession.
The LSB was responding to advice from its consumer panel in June on the adequacy of regulators’ financial protection arrangements, and the appropriate level of risk that consumers should be expected to bear.
It supported the compulsory nature of PII and compensation arrangements but said PII should be risk based, linked to the activities a firm carries out.
“We can therefore see merit in regulators exploring whether there could be common requirements for minimum PII terms and conditions for the same activities, in particular conveyancing…
“However, we do not consider that setting minimum terms and conditions for PII is necessarily appropriate for all firms. Levels of PII must be adequate for the services provided and the consumers to whom they are provided.”
That meant, for example, that minimum terms may not be needed for large corporate firms “because their clients should be able to carry out their own checks on the adequacy of the firm’s PII cover.”
The LSB noted that the Legal Services Act requires regulators to have compensation “arrangements”, not simply funds. “Alternatives to a fund may be more appropriate or efficient than having a large amount of money sitting in a fund at any one time.”
While agreeing with the panel that consumers should not be required to source all their own PII, it also supported the contention that they “should bear some risk”.
“Where there are gaps in the protection provided by compulsory PII requirements, we see merit in the development of ‘top-up’ products by insurers,” the LSB said. “We would welcome a debate on whether it is appropriate in some cases (such as conveyancing) to place a cap on the level of compensation available so that purchasers of very expensive properties are not subsidised by those buying less expensive ones.
“Again, if there was a need for ‘top-up’ products, we anticipate that insurers would respond to that need.”
The panel’s stand-out recommendation was that the idea of centralised protection arrangements for all regulated providers should be fully scoped out.
The LSB said the possibility of a single compensation fund, or other arrangement, was for regulators to take forward if they wanted. It may have “the advantage of removing the blanket compulsory nature of the current arrangements since membership of such a scheme could be based on the risk of fraudulent activity.
“This could remove the cross-subsidies inherent in the current system, for example from firms that do not handle any (or handle only small) amounts of client money to those that handle large amounts.”
However, the LSB was “more circumspect” about whether uniform PII requirements could work in a liberalising market, where insurers’ decisions are based on risk.
Consumer panel chair Elisabeth Davies said: “The LSB has given the green light to regulators to explore further the scope of a single compensation fund – our proposal to look at the feasibility of such a scheme has since been backed by the CLC and mortgage lenders.
“Given this support, we now want to see the SRA work with these organisations to explore this option as part of their current compensation fund review.”