The Solicitors Regulation Authority (SRA) has hit back at criticism from the Legal Services Board (LSB) over its plans to cut the minimum compulsory cover for law firms from £2m to £500,000.
“The current level of cover is an arbitrary, generic level set several years ago with an un-evidenced distinction between partnership and limited liability law firms,” Paul Philip, chief executive of the SRA, said.
“It has been overtaken by developments in the current legal market and there is no convincing evidence that it is appropriate.”
In a letter to Chris Kenny, chief executive of the LSB, Mr Philip said: “Many small firms offer services such as consumer or immigration advice where the potential loss recoverable by damages is far below even £500,000.
“Forcing them to obtain compulsory cover for £2m or £3m is to impose a significant and disproportionate barrier to them and to the consumers who need such advice.”
The LSB announced last month that it had extended the time it is allowing itself to make a decision on the planned minimum cover cut until August 2015, effectively scuppering a cut in time for next month’s renewals. The decision came in a warning notice issued to the Law Society, informing the society that it was “considering whether to refuse in part” the regulator’s plans.
Mr Philip said the SRA was opposed to the suggestion from the LSB that it would refuse only the part relating to the cut in cover to £500,000. Otherwise the result would to “increase burdens on some law firms without offering commensurate opportunities to reduce costs”, he said.
Mr Philip said that the SRA believed the minimum cover limit should be set at the “lowest level that secures protection for most consumers in most circumstances”. He went on: “That is a balancing and proportionality exercise based on available information: it is a judgment call by our board.
“The evidence for choosing £500,000 is of course incomplete. £500,000 is a compromise between available evidence, regulatory and economic thinking and good regulatory practice. It is of course influenced by your statutory guidance and other commentary.”
On cost savings, Mr Philip said the regulator had received “clear statements from some insurers that they would expect to see prices fall, and our expert advisers gave us clear advice on costs of cover at the revised minimum level as well as for top-up cover, including on the basis of the minimum terms and conditions.”
The SRA chief executive said that in the period between its application for a rule change in mid-July and the LSB’s warning notice in mid-August, there was “some market activity that supported our expectations”.
This included an offer by Chancery Pii, an indemnity insurer specialising in firms with one to four partners and backed by the Law Society, of cover below £2m at a reduced amount.
Mr Philip said he did not believe that because £500,000 was appropriate for one legal regulator, it should be so for all, but he said the LSB must be consistent in how it applied its rules and the evidence it required.
He concluded that the LSB had “pushed the SRA hard to reform and we have responded in line with LSB guidance. The pace of reform has been too slow and we should now be working together to increase it”.