The Solicitors Regulation Authority (SRA) has ended a controversial five-year project to reform the professional indemnity insurance regime, meaning the minimum level of cover will not be cut to £500,000.
It said the 160 responses to a consultation issued in March 2018 indicated that insurers might not reduce premiums, or firms might not take the opportunity to lower their cover.
There was also concern that, if changes resulted in firms buying additional layers of insurance to maintain current levels, costs and complexity could increase. Even if costs were lowered, some thought that overall consumer protection would be reduced.
A statement issued today said: “The SRA has decided not to introduce any of the proposed changes. In light of the consultation responses, it seems unlikely that firms or insurers would respond to the proposals that would lead to the intended benefits materialising in the foreseeable future.
“The SRA also recognises that the insurance market is currently hardening and contracting, which would add another layer or risk to any changes.”
The regulator’s first effort to cut the minimum level of cover to £500,000 – as opposed to the current £2m (or £3m for incorporated firms) – was rejected by the Legal Services Board in 2014.
Last year’s proposals aimed to allow firms more flexibility to buy the most appropriate insurance given the risk profile of the services they provided.
They also included a higher £1m minimum for conveyancing firms, and removing the need for compulsory insurance to include cover for financial institutions, along with corporate and other large business clients with turnover of more than £2m – but firms would still have been under an obligation to put in place appropriate and adequate cover for these clients.
Other feedback from the consultation was that the proposals could lead more claims against brokers for poor advice, an increase in coverage disputes and possible uninsured losses, and co-insurance ceasing to be commercially viable for the reduced level of cover being bought, resulting in fewer insurers offering cover and at higher prices.
It was also warned that the number of firms sitting on lender panels may be reduced by lenders looking to minimise the search costs of checking whether firms had adequate cover.
The Law Society, Legal Services Consumer Panel and Association of British Insurers were among those to speak out against the changes.
SRA chief executive Paul Philip said: “Indemnity insurance is a very significant cost for the sector, so it’s important that we periodically review arrangements, but this is a complex area with no easy answers.
“We need to make sure we are getting the balance right… The feedback and market insight we received was invaluable, making it clear that the changes we were proposing were unlikely to deliver benefits for the firms and clients in the foreseeable future.”
However, the SRA is to continue working on three specific issues: how it can make it easier for firms to close in an orderly way, including reviewing the SRA successor practice definition; exploring what should be in the scope of cybercrime cover and working with insurers to support the development of products; and reviewing the participating insurers agreement, with a view to updating it for the 2020/21 indemnity year.
Last year’s consultation said some firms structured themselves in a way to avoid meeting the definition of successor practice, while in other instances multiple firms may meet it, resulting in confusion as to where the liability lies.
The SRA also consulted on potential changes to the Compensation Fund rules. It said the responses have also “altered the SRA’s thinking”. It plans to amend the proposals.
Law Society president Simon Davis said the regulator should be “heartily commended for listening and taking account of the evidence presented to them and recognising that their proposed reforms would not deliver the hoped-for benefits”.
He said: “The Law Society worked with the insurance industry and client groups to present a compelling case against the proposed reforms. Our consultation response was supported by many submissions from local law societies, specialist groups representing lawyers, and individual solicitors.
“With one voice, solicitors urged the SRA to maintain the rigorous professional indemnity insurance rules that protect our clients and the profession.”
Mr Davis said that premiums already reflected levels of risk in the work a firm undertook, “so the idea that the current system is unfairly ‘one size fits all’ is without foundation, and cost is front-loaded into the first £500,000 of cover, so lowering minimum indemnity limits to anything less than that would not have led to savings”.
He added: “The proposed changes would have radically reduced financial protections for clients and solicitors and were without merit, so it is hugely reassuring that they have been abandoned.”