The Solicitors Regulation Authority (SRA) has finally given ground over unrated insurers and is to investigate again whether it should introduce financial eligibility criteria.
Problems in the past with the insolvencies of Quinn and Lemma, and this year Balva, have forced the regulator to launch an assessment of the “full implications” of such a move.
The review will be completed in time for any decisions to be made for the indemnity period starting on 1 October 2014.
The SRA’s has held firm to the position that it defers to insurance regulators here and in Europe to vet financial stability of providers.
However, the SRA said yesterday that it decided two months ago, when Latvian insurer Balva first encountered regulatory issues in its own country, to review the current arrangements with a view to ensuring clients are not at risk should there be an ‘insolvency event’.
If an insurer becomes insolvent, the insured firm would be able claim against the Financial Services Compensation Scheme if eligible, with indirect benefits for its clients.
Last month the SRA’s standards committee agreed for further work to be carried out including an assessment of the full implications of introducing financial rating criteria.
Agnieszka Scott, SRA director for policy, said: “We have always made our position clear on insurance companies: we don’t regulate them, that is the job of others. Our role is to ensure that they are regulated and approved to provide cover in England and Wales.
“There have been numerous calls for us to allow rated insurers only, but we have resisted this restriction as it would be an unwarranted barrier to entry into the solicitors’ PII market. Until now, it would have been disproportionate for us to introduce financial rating criteria.
“However, in the light of the insolvency of Lemma last year and recent developments with Balva, we decided that we need to look again.”
A Law Society spokeswoman said: “The Law Society welcomes the news that the SRA has identified the pressing need to give further consideration to reform within this problematic area. For some time now, the Law Society has been vocal in highlighting its concern about the threat to the solicitors’ PII market occasioned by the risk of insurer insolvency and has taken strong steps to educate its members about the importance of considering an insurer’s financial security rating before purchasing PII cover.
“It is clearly for the SRA to address the risk to the system for protection of the pubic presented by failures in the regulation of insurers.”