Controversial Solicitors Regulation Authority (SRA) plans to cut the maximum award from its Compensation Fund from £2m to £500,000 are facing rejection by the Legal Services Board (LSB).
LSB chief executive Matthew Hill has issued a warning notice that it is considering refusing permission for the change, along with one that would exclude claims from “large” charities and trusts with assets or annual income of over £2m.
He said the oversight regulator was concerned that granting the application “would be prejudicial to the regulatory objectives, in particular, protecting and promoting the interests of consumers, and protecting and promoting the public interest”.
As a result, the LSB now has a year to gather further advice and evidence before making a final decision – it had been due to issue its decision by today.
The Compensation Fund pays grants to people who have suffered financial loss because of a solicitor’s dishonesty or failure to account for client money where not covered by indemnity insurance.
Despite strong opposition from both the Law Society and the Legal Services Consumer Panel, the SRA decided last year to reduce the maximum payment for a single grant to £500,000, saying only 0.2% of all payments over the previous 15 years have been for more than that amount.
Mr Hill said SRA data showed that, if that cap had been in place since 2010, a small number of consumers would have experienced “significant detriment”, while costs savings would have been an annual average of £2.50 per solicitor and £50 per firm.
“Although the LSB recognises the benefit of this proposal, it does not consider that this alone justifies the significant detriment that would be experienced by a small number of consumers.
“The LSB considers that the SRA should provide further explanation or quantify the wider potential benefits of the individual cap that could be realised to offset this significant detriment.”
There was also insufficient evidence that the change would, as the SRA claimed, prevent large fluctuations in the sums that solicitors and law firms have to contribute to pay for the scheme, he added.
The other disputed change aims to bring charities and trusts in line with the cap on claims by commercial entities, but Mr Hill said “additional consideration and explanation of this approach” were required to justify the potential detriment to charities and trusts.
The SRA and others can now make further submissions to the LSB, and Mr Hill said it would also seek advice from the Charity Commission “and other experts”.
An SRA spokesman said: “We have received the LSB’s notice and will review the issues raised before deciding on next steps.”
Law Society president I Stephanie Boyce said: “We opposed the SRA’s proposal to reduce the maximum Compensation Fund grant because, as the LSB observed, the cost savings to the profession would be minimal, but the harm to the handful of claimants who would be adversely affected by the new cap could be devastating.
“We are pleased to see the LSB is giving proper consideration to this rule change application, interrogating the evidence and fulfilling their statutory responsibility to protect the interests of consumers.”
Back in 2014, the LSB rejected rejected a similar proposal to reduce the minimum level of insurance cover firms had to hold to £500,000 and ultimately dropped.