SRA floats end to both compulsory minimum PII and compensation fund

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9 July 2015

SRA: let business clients decide on what PII they want?

SRA: let business clients decide on what PII they want?

An end to a compulsory minimum level of professional indemnity insurance (PII) and replacing the compensation fund with an insurance policy are among the ideas for reform of client protection arrangements put forward by the Solicitors Regulation Authority.

In a discussion paper issued yesterday, the regulator also revived an idea first consulted on last year to remove the compulsory requirement for insurance for more sophisticated clients, in particular in the conveyancing market.

The paper is the latest stage in the SRA’s review of client protection and will lead to a consultation in early 2016, ahead of possible implementation in October 2016.

Last year the Legal Services Board rejected the SRA’s proposal to reduce the level of compulsory cover to £500,000 on any one claim, saying it was not backed up by enough evidence. “What matters is that firms have the right incentives to assess their risks accurately and so ensure that consumers are protected,” it said. “It is not clear to the board that a minimum level of cover necessarily has a place in achieving that.”

The SRA paper followed this up: “Now we have the new outcome in the code of conduct requiring firms to assess and purchase an appropriate level of PII cover, one option might be to have no minimum limit. This would maximise the opportunities for firms to negotiate limits most appropriate to their business activities with the associated reductions in cost benefiting consumers…

“We believe that any such change would be best combined with requirements to make information available to consumers so prospective clients could make informed choices.”

Last year the SRA dropped a proposal to restrict compulsory cover to individuals, small and medium sized micro-enterprises, trusts and charities after strong opposition in its consultation.

The discussion paper said: “Our position remains that more sophisticated clients, such as large corporations many of whom have substantial in-house legal resources, should be able to assure themselves as to the adequacy of insurance arrangements relating to legal services and therefore do not require the protection of the MTC [minimum terms and conditions].

“Limiting the compulsory cover provides potential for more flexibility and a lower cost of insurance, especially for firms providing services only to this group of clients. There is of course nothing to prevent any lawyer or firm to purchase the level and extent of cover that they consider is right for them and their clients.”

It also revisited other ideas consulted on last year, such as a cap on insurers’ ultimate exposure through an aggregation limit and requiring firms to have three rather than six years of run-off cover.

Among several further issues under consideration are removing cover for defence costs and for awards made by the Legal Ombudsman from the MTC, and introducing a hardship fund – paid for by the whole profession – to help firms pay for run-off cover in certain circumstances.

On the compensation fund, the discussion paper sought views on reducing the current £2m limit on awards and finding alternatives to the current flat levy charged on the profession to fund it.

More broadly, the discussion paper asked whether there were alternatives to the fund altogether. It explained: “An issue with the current model is that in some cases, the compensation fund is relied on for grants where there is a case that insurers should have borne the cost of the claim but have refused to indemnify or make payments. There can be significant costs incurred to challenge these declinations and/or to recover the costs from solicitors or insurers directly after the event in order to protect clients.

“We have in the past explored with insurers the viability of insuring some of the risks covered by compensation fund, for example stop loss cover designed to deal with catastrophic and unexpected events but at that time the prospect of a viable scheme seemed poor. The insurance market may have evolved since then.

“We have considered the option of replacing the compensation fund arrangements with an insurance policy in the name of the SRA to meet the claims of clients who have suffered loss as a result of a firm’s dishonesty or failure to account. This might offer benefits from a better alignment between the two schemes. A market solution across the two schemes could also facilitate risk-based pricing.”

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