Replacing SIF with compensation fund would be “unlawful”

Maher: SIF’s financial situation does not warrant closing it now

It would be unlawful for the Solicitors Regulation Authority (SRA) to replace the Solicitors Indemnity Fund (SIF) with some form of compensation fund, a leading adviser to law firms and their insurers has argued.

Frank Maher, partner at Liverpool firm Legal Risk, also suggested that the financial problems facing the fund were down to the Law Society.

An SRA discussion paper said “a new consumer protection arrangement within the SRA” – either an indemnity scheme or compensation fund – was likely to be more cost-effective than retaining SIF, which covers claims made against solicitors after the six-year period of run-off cover.

Among other things, it advanced the idea of blocking claims from businesses, charities or trusts with income or assets of over £2m.

Legal Risk’s response said “there seems little point in setting up a new indemnity scheme when SIF already exists” – any scope for reducing cost could be achieved within the existing structure.

A compensation fund, he went on, was not in the interests of either consumers or solicitors and their staff.

“The discussion paper envisages that such a fund, protecting consumers but not solicitors and their staff, might have subrogated rights of recovery against the latter, who would in any event be unprotected.”

Mr Maher said that, as SIF was funded by the profession “under compulsion of law [section 37 of the Solicitors Act 1974] and for the purposes of providing indemnity”, it would be irrational, Wednesbury unreasonable and unlawful for the SRA to withdraw cover and apply the remaining sums “in a manner which does not provide indemnity for solicitors and their staff”.

He continued: “Solicitors contributed to SIF in the reasonable expectation that the money they had contributed would be used to continue to provide cover… The purpose for which SIF was established was not only to protect consumers but also solicitors and their staff…

“Pursuit of subrogated rights vested in a compensation fund would in our submission also breach the SRA’s obligations under section 28 of the Legal Services Act, which requires that the SRA act in a manner which is ‘transparent, accountable, proportionate… and targeted only at cases in which action is needed’.”

Mr Maher noted that SIF’s 2020 accounts showed a residual surplus of £22.5m and that it has not required additional funding from the profession in two decades, “with the cost of claims for many years, it would appear, being covered by investment income”.

He went on: “Any perceived shortage of funds in SIF is attributable to the withdrawal by the Law Society in 2006 of £25m and, we believe, a similar sum the following year making a total of £50m; these sums were applied for a wholly extraneous purpose of paying the Law Society’s own staff, through its pension fund, instead of indemnifying solicitors and their staff against claims.”

While SIF’s reserves may not suffice for the future, the likely annual cost of funding which would have to be met by the profession were SIF to continue “appears to be low”, around £10-15 per practising solicitor, “and may be rather less once account is taken of investment income”.

“If that were to change significantly, the situation could be reviewed in the future: it does not warrant a decision to terminate SIF now.”

In its response, the Professional Negligence Lawyers Association agreed that the legal entitlement to funds in SIF “appears to be for the purposes of providing professional indemnity insurance to solicitors”.

“Whether or not such funds can lawfully or should be allocated elsewhere for a different purpose lies at the heart of this SRA discussion paper. If the funds can lawfully only be used to indemnity solicitors, then that should potentially be the end of this discussion.”

The response went on to argue that “the position of the retired solicitor should be addressed first when the [SRA] board considers closing SIF and making them uninsured for corporate claimants”.

President Katy Manley observed that, whilst mortgage lenders funded and pursued claims, the ultimate financial benefit of recovery was to the consumer borrower by a reduction in the mortgage debt.

“There are other examples where corporate claims result in benefits to individual consumers as creditors or shareholders, for example.”

Saying the most “responsible” decision would be to retain SIF, the association said the other options “wrongly try to conflate” indemnity insurance with the SRA Compensation Fund, “which is a wholly different discretionary fund”.

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