The Solicitors Regulation Authority (SRA) is pressing on with plans to cut the upper limit for Compensation Fund awards from £2m to £500,000, while modifying other proposals to reduce the cost of the scheme.
Plans to exclude people living in ‘wealthy households’ have been dropped, but barristers and expert witnesses would not get compensation for unpaid fees.
The compensation fund pays grants to those who have suffered financial hardship because of a solicitor’s dishonesty or failure to account for client money.
Contributions to the scheme from individual solicitors had risen from £32 in 2016-17 to £90 in 2018-19, before falling back to £60 this year. Contributions from firms have risen from £548 in 2016-17 to £1,680 in 2018-19, before dropping to £1,150.
Announcing last month that it had abandoned plans to cut the minimum level of cover for solicitors’ indemnity insurance to £500,000, the SRA said responses to a consultation on indemnity insurance and the Compensation Fund launched in 2018 had “altered the SRA’s thinking” on the fund’s future.
In a fresh 12-week consultation on the Compensation Fund alone launched yesterday, the regulator said it was “progressing with some of the proposals” while revising its approach elsewhere.
On cutting maximum payments from £2m to £500,000, the SRA said 75% of compensation grants from 2010 to 2018 were for less than £5,000 and only 0.4% for over £500,000. However, the latter totalled £14m over the period, or 10% in terms of value.
Two other legal regulators, the Institute of Chartered Accountants in England and Wales and CILEx Regulation, have a £500,000 limit for compensation payments. The Council for Licensed Conveyancers has no limit.
The SRA would still be able to pay more than £500,000 “in the public interest on an exceptional case-by-case basis”.
Applications for unpaid fees from barristers and expert witnesses would be excluded because they had the skills to “pursue other routes of redress”, such as debt recovery.
Grants would no longer be made to any applicant to cover litigation costs where they pursued “other means of redress”.
There would also be a “clearer and more robust approach” to taking into account the applicant’s behaviour, for example where steps were not taken to confirm that a high-yield investment scheme was genuine. There would be a new requirement for “full and frank disclosure”.
The existing exclusion on claims by businesses with turnovers of over £2m would continue under the plans, but eligibility would be extended to charities and trusts with income and assets of more than £2m.
The proposal to exclude people living in ‘wealthy households’, with assets of over £250,000 excluding property and pensions, from making applications has been dropped.
The existing ‘hardship’ criteria which apply to all kinds of applicant would be scrapped, but applications would be limited to “those for whom the legal service is being or has been provided”.
The SRA said this would not exclude the beneficiaries of wills but would include “buyers who have lost money because of the dishonesty of their seller’s solicitor in a conveyancing transaction”.
The regulator would apply a total cap of £5m to claims arising from a “single or connected event”, or a particular investment scheme.
Along with the consultation paper, the SRA published a ‘supporting evidence and analysis’ document, which concluded that the Compensation Fund was “generous compared to funds operated by other legal services regulators”.
The document highlighted the risks from a “wide spectrum” of solicitors’ involvement in investment schemes and said the SRA was creating a £30m contingency reserve for future payments.
Paul Philip, chief executive of the SRA, said the Compensation Fund provided “an essential safety net” but came at a cost to the profession and ultimately the client.
“We have seen how significant risks in the market over recent years, including solicitor involvement in dubious investment schemes, have affected the fund and contributions from the profession.
“We want to strike the right balance between protecting clients’ money and making sure that the fund remains sustainable for the future.”