SRA “has not justified” huge compensation fund levy rises

Jeffery: SRA needs to show concrete evidence

The Solicitors Regulation Authority (SRA) has not done enough to justify the huge increases in compensation fund contributions for the coming year, the Law Society has argued.

The regulator has recognised the disproportionate impact on smaller law firms but not shown that it considered measures to mitigate this, said Chancery Lane’s response to the SRA’s consultation.

The SRA’s draft annual business plan and budget from 1 November 2024 proposes increasing the contribution for individual solicitors, which is usually paid by their firms, from £30 to £90 and for law firms that hold client money from £660 to £2,220.

It said the hike was the result of “exceptional levels of intervention costs and compensation claims over the previous financial year”.

The Law Society’s response expressed strong support for the fund – which compensates the victims of solicitors’ fraud or other default where there is no other recourse (such as insurance) – but said the increase has caused “significant concern for the profession, where many law firms, especially sole practitioners and small firms, are already struggling with challenging business conditions and increased costs”.

The SRA has set out four principles to govern the levy. The overriding principle is to maintain the viability of the fund, while it pledges to ensure the profession’s contributions “are as manageable as possible”, that it will collect them “in a way that is manageable for those we regulate”, and that it will be transparent about the fund monies and their management.

The Law Society said the information provided in the consultation paper breached all but the first principle, urging the regulator to explain its thinking more clearly, including the alternatives that were considered.

As an example, the SRA recoups the costs of interventions from the fund and the society questioned whether it could spread this out.

“Our understanding is that the SRA’s reserves are in credit, and therefore there is likely to be no need to recover these funds right away.

“If, instead of using the compensation fund to refund the cost of interventions now, the SRA chose to defer collection, or recover the money incrementally over a period of years, then that could potentially reduce the need to call such significant amounts from compensation fund in the current year.”

The SRA announced in May that it had also arranged a £10m borrowing facility to ensure it has access to cash to deal with an unexpected large-scale intervention, and the Law Society asked why it did not use it proactively to reduce the levy this year.

The society wanted to know as well whether the SRA considered giving firms the option of deferring payments or paying by instalments.

Changes to the fund in future are already being considered by the SRA’s consumer protection review, including the idea of varying contributions on the basis of risk, rather than having a flat fee as now.

While the Law Society said it was “questionable” how this could be done in practice, it agreed that the regulator should explore the issue.

Another consideration should be the substantial growth in the number of solicitors over the last decade alongside a decline in the number of firms, meaning that while in 2010-11 the firm levy was 12 times the value of the individual fee, by 2023-24 it was 25 times.

“The consequence of this is that smaller firms are paying substantially more in compensation fund contributions than they did 14 years ago, and larger firms are – relative to small firms, at least – paying substantially less (although they too are paying more in real terms).”

Law Society chief executive Ian Jeffery said: “We expect that when the SRA applies for the Legal Services Board to approve the levy, their application will include concrete evidence explaining the rationale for the huge increase to be collected in a single year.

“We are aware that there have been a number of recent failures that have placed considerable strain on the resources of the compensation fund – most notably the collapse of Axiom Ince – so we see the need to rebuild the fund’s reserves over time.

“However, we also want to understand what measures the SRA is putting in place to minimise the risk of the rising number of calls on the fund.”

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