Solicitors Regulation Authority (SRA) plans to consult on whether the cost of interventions in failing law firms should be borne by the Compensation Fund have been queried as pointless because there is no realistic alternative.
The SRA has indicated it will need to invoke statutory powers to use the fund to cover the cost of interventions in 2014 as well as this year, in its bleakest assessment yet of the likelihood of a prolonged series of costly interventions.
Speaking at the authority’s board meeting in Birmingham yesterday, executive director Richard Collins said: “We don’t see the conditions that are creating this problem for us changing in 2014.”
High-profile financial failures such as Blakemores  and Atteys earlier this year have meant the interventions estimate has been revised upwards to 63, whereas the budget assumed just 30 interventions at a cost of under £1.3m. Archiving of case files alone is now estimated to cost £1.6m this year.
Mr Collins said the best-case scenario was that the SRA would need a further £7m this year – assuming no major firm intervention – which would need to be paid out of the Compensation Fund. The worst case, assuming just one major intervention, was of a £15m shortfall.
Other possible funding options included a call on the cash reserves of the Law Society; but he said this had been discounted as having “insufficient headroom” by the joint Law Society/SRA business and oversight board (BOB). Another option, a “one-off cash call on the profession”, was problematic for several reasons, such as the lack of certainty about the sum required, the cost of undertaking it, and the effect on firms that had not budgeted for the levy.
Mr Collins said invoking the Solicitors Act 1974 (as amended), which allowed the Compensation Fund to be used to cover the cost of interventions, was the only realistic option. Alternatives for funding were “unattractive and probably almost impossible” and that “in effect there is virtually no alternative”.
He said the SRA would publish a short consultation paper “to set out to people very clearly what the position is and why we are proposing to make the change”.
However, solicitor board member Cindy Leslie, a former Denton Wilde Sapte partner, queried whether a consultation was appropriate when the SRA was not seriously considering alternatives. “In reality, isn’t there really one option and therefore… why not just communicate the reason for doing that this year?” she asked.
Mr Collins agreed it was important that “we don’t mislead anybody that we don’t have an incredibly strong view that this is the only solution”. But he said a consultation paper would be a useful “vehicle” in which to set out the SRA’s rationale. Meanwhile, the profession could be reminded that the SRA was also engaged in a fundamental review of the future of the Compensation Fund from 2015 onwards.
Lay member Jane Furniss said the paper would present an opportunity for the SRA to acknowledge that under the current regime hard-pressed firms that followed the rules were having to bail out firms that failed. The SRA could make it clear that this is being done to protect the public, she added.