The Law Society has strongly attacked plans unveiled yesterday by the Solicitors Regulation Authority (SRA) to scrap the Solicitors Indemnity Fund (SIF), which protects solicitors against claims made after the six-year run-off period following closure of a law firm.
The SRA said that, if the SIF closed as planned in September next year, its surplus funds could be transferred to the society and used “to support its members and to help provide the ‘sleep easy’ factor for retired solicitors”.
The SIF was due to close in 2017, but the SRA extended the deadline three times, most recently in June, after warnings that the owners of law firms faced an uphill struggle to find alternative cover.
The SRA said in a consultation paper  that it had been told by SIF Ltd that provision of existing cover for a further period was not “prudent, bearing in mind SIF Ltd’s solvency policy, and without any additional funding”.
Having obtained independent expert analysis of historical claims data from actuaries at Willis Towers Watson (WTW), the SRA said it “had become clear that the level of consumer protection” offered by prolonging the life of SIF or replacing it with an alternative model would be “very small”, making it likely that it would be “disproportionate for us to deliver, through a regulatory scheme”.
Anna Bradley, chair of the SRA board, said: “We appreciate that this is a controversial issue for some within the profession and indeed that there are a variety of views.
“As the regulator, we have to consider the right arrangements for the future, with a sharp focus on the interests of consumers and our other regulatory objectives.
“Our analysis, in the light of detailed evidence, shows that establishing or maintaining a regulatory scheme to deliver ongoing post six-year run-off cover is unlikely to be proportionate in light of the level of consumer protection it provides.”
However, Law Society president I Stephanie Boyce said getting rid of SIF would make the market “less safe for consumers” as well as having a “huge impact” on those directly affected.
“The average successful claim is over £34,000, which is a large amount of money for most people.”
Ms Boyce said the regulator was yet to demonstrate that the change would have “any material impact” on the cost of legal services or lead to any improvement in the market.
“It is our belief that retaining SIF would be in the best interests of consumers and the profession alike.”
In the consultation paper, the SRA said 90% of run-off claims were made in the first six years after a law firm closed and for which solicitors are obliged to obtain insurance for under the minimum terms and conditions of insurance.
The regulator said WTW had estimated that, following the planned closure of SIF in September 2022, an average of 45 post-six-year claims would be notified at an average cost of £36,800 each in 2023, falling to only 31 from 2029 “based on the recent history of cessations and expected claims”.
However, the requirement for ongoing funding from the profession is estimated as up to £2.4m a year – significantly more than will be paid out.
WTW found that conveyancing had accounted for approximately 74% of existing claims by value and 76% by number since 2000, with most claims relating to sole practitioners and small firms, and “only 10% relating to firms with six or more partners”.
The alternatives to SIF set out in the consultation paper included insurance through the open market, a master insurance policy and an alternative indemnity fund.
The SRA said amending its minimum terms and conditions to require solicitors to continue to insure themselves against post six-year claims through the open market was not its preferred option.
This would not “present a proportionate regulatory intervention given the limited number of consumers that would likely benefit, and levels of consumer protection it would deliver”.
Another option would be continuing cover through a master insurance policy provided by a “partner insurer”, but WTW had warned it would be “challenging to interest market insurers in this risk” because of the small number and value of claims, the “inherent expense of dealing with long-tail claims and the potential volatility”.
A third option would be an alternative indemnity fund, based on a “more cost-effective” model than SIF.
Although there may be cheaper alternative models to SIF in terms of overall cost and alternative funding options, the SRA said regulatory arrangements were “inherently unlikely to be cost effective, proportionate or efficient when considering the volume and value of claims”.
The SRA said it had set up a ‘virtual reference group’ for its proposals, including 29 representatives from the Law Society, local law societies, groups representing different segments of the profession, insurers and the Legal Services Consumer Panel.
Responding to a survey, which was also sent to some of the larger law firms, the “majority view” of the group was that post six-year cover should be “maintained for the whole profession, with a minority saying that it is only needed for specific segments of the profession, for example smaller firms”.
The regulator added that if the SIF closed and solicitors were no longer required to insure themselves beyond a six-year period, “our initial view is that the surplus funds would fall to be returned to the Law Society to be applied for the overall benefit of the profession”.
In this case there was “room for discussion about the options” available to the society “to support its members and help provide the ‘sleep easy’ factor for retired solicitors”.