The Solicitors Regulation Authority (SRA) has said it believes “a new consumer protection arrangement within the SRA” was likely to be more cost-effective than retaining the Solicitors Indemnity Fund (SIF).
After years of pressing for the SIF’s closure, the regulator has now accepted there was “some evidence” of risks to “a small number of consumers” if the task of protecting solicitors against claims made after the six-year run-off period following closure of their firms was left to the open market.
Having agreed in April this year to yet another extension in the life of the SIF to September 2023, the SRA has also provided an undertaking to underwrite its potential liabilities of up to £6m.
The SIF was first scheduled to close in 2017 but the deadline has been repeatedly extended over concerns that law firm owners would face an uphill struggle to find alternative cover.
A discussion paper issued yesterday said the SRA was considering two main options for the future of the SIF.
One would retain it “with changes to reduce operating costs”, while the other would be to “set up a new consumer protection arrangement” within the SRA.
“We have powers to set up a new SRA consumer protection arrangement as an indemnity scheme or a compensation fund.”
The SRA said it was “still exploring the costs and funding requirements of these options”, but a new SRA arrangement was “likely to be more cost-effective on an ongoing basis than retaining the SIF” and could provide “broadly the same” consumer protection “at a cost proportionate to the benefits of the protection provided”.
Further consultation might include “consideration of the potential to use assets currently held by the SIF to fund the operating costs of a future consumer protection scheme for a period and/or to generate investment income to help to offset the scheme’s future operating costs”.
The SRA said it would decide on future arrangements at its next board meeting in September and would then hold a full consultation on next steps.
The SRA said responses to its last consultation highlighted concerns that closing SIF without making alternative arrangements could have “a greater impact on consumer protection” than its own analysis suggested “because of the significant consequences that losses can have on the small number of individual consumers affected”.
The regulator said that it had since reviewed its initial analysis “in the light of other available evidence about potential consumer detriment” and discussed the issue with the Legal Services Consumer Panel and representative bodies.
The panel strongly opposed closure of SIF and in an unprecedented joint statement with the Law Society earlier this year described the SRA’s analysis of the situation as “staggeringly subjective and distorted”.
The SRA said it had identified “some evidence to support the concerns raised in consultation” and had confirmed that “negligence emerging more than six years after the closure of a firm poses material risks to a small number of consumers”.
The discussion paper also put forward options on changes to the rules to restrict claims to any future SIF or SIF replacement.
One would be blocking claims from businesses, charities or trusts with income or assets of over £2m, in a similar approach to that taken by the SRA Compensation Fund.
Another would be following the Compensation Fund in no longer covering claimant costs.
A further option would be recovering costs from the law firm “up to the level of the excess in the preceding PII policy”, a power enjoyed by the SIF but one it had not been able to provide data about.
“We would not expect a new consumer protection arrangement to use recovery powers that could cause detriment to consumers so, for instance, any excess payment would only be pursued after the consumer’s claim had been met in full.”
Anna Bradley, chair of the SRA, commented: “Our work over the last few months has helped us to better understand what consumer protection for negligence claims brought more than six years after a firm has closed can offer some users of legal services.
“We have also been looking at how best to maintain that protection in a cost-effective and proportionate way if we decide that’s the right thing to do.”
I Stephanie Boyce, president of the Law Society, welcomed the SRA’s recognition that consumers could face “serious detriment” if post six-year claims were left unaddressed.
“Consumers trust their solicitor is adequately and appropriately insured, and that they will be compensated for any losses on the rare occasion something goes wrong.”
“Low consumer awareness about the details of PII arrangements coupled with the public’s high expectations of the profession make it all the more important that such protections are in place.”