SRA unveils sweeping reforms to indemnity insurance and compensation fund

Passmore: Fund is for those facing hardship

The Solicitors Regulation Authority (SRA) has today unveiled its second attempt to reduce the compulsory level of professional indemnity insurance (PII) to £500,000 – although conveyancers would have to secure £1m in cover.

It has also outlined radical reform of the Compensation Fund with the aim of turning it explicitly into a ‘hardship’ fund and banning relatively wealthy people from claiming on it.

The SRA said its consultation would be framed by the question of what the profession should provide by way of consumer protection for financial loss, and how cost and access to legal services should be balanced.

One of the reasons the Legal Services Board gave in November 2014 for rejecting the SRA’s first bid to reduce the minimum cover back was the lack of evidence, but detailed research since carried out by the SRA into the last decade’s claims experience showed that 98% of claims were for less than £580,000.

The regulator said it would check that conveyancing firms took out the extra cover by cross-referencing Land Registry and insurer data; firms that did not tell their insurers they did conveyancing work would not be covered for such claims.

The consultation said: “If [reducing the minimum level of cover] results in lower insurance premiums, this could encourage new entrants into the market. This may increase competition and the opportunity for people to access more affordable legal services.

“It may reduce costs for small firms in particular, helping them to be more sustainable, supporting consumer choice and access to justice for people needing legal services.”

The SRA said it would strengthen guidance on where firms might need to purchase additional cover.

“For example we would expect firms working in residential ‘property hotspots’ to make sure they have appropriate cover for their work.

“There is limited evidence that firms currently under-insure and we believe competition by insurers would maintain wide coverage where a firm needed to buy additional cover.”

Back in 2014, the SRA proposed reducing the requirement for run-off insurance to three years – given its cost – but now it recommends keeping the six-year period but capping the overall level of cover at £3m for firms that have done conveyancing work and £1.5m for other firms

The blueprint would also remove 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 be under an obligation to put in place appropriate and adequate cover for these clients.

The SRA said the changes would be supported by a “stronger enforcement approach” for firms that did not pay insurance premiums or had misled their insurer.

It is also seeking views on whether the current successor practice rules are fit for purpose. Unusually, the consultation lays out a series of reforms that were considered but rejected, but asks for views on them in case there is an argument or evidence to the contrary.

On the Compensation Fund, the plan is to reduce the maximum payout for fraud from £2m to £500,000.

The consultation said: “The payment limit should be set at a level that provides targeted consumer protection to relive hardship whilst securing the ongoing viability of the fund.

“The current maximum was introduced to align with the level of mandatory cover for a single claim under our PII arrangements. Our data shows that the highest amount paid out has never reached the maximum. Only a few payments have been more than £500,000.

“These tend to be linked to fraudulent probate and conveyancing transactions. The data does not suggest that we should apply differential limits as we are proposing for PII claims.”

So as to ensure the fund targets those who needs its help most, the SRA would introduce a ban on individuals with “net household financial wealth” – which excludes physical wealth, property and pension assets – of over £250,000. It said this was about 5% of the population.

However, in a media briefing yesterday, SRA policy director Crispin Passmore stressed that this figure was very much a “starting point for discussion”.

“The most important question is whether this is a hardship fund,” he said. “If not, what is it?”

Currently, businesses with an income above £2m cannot claim on the fund, while charities with an income or trusts with assets above £2m can claim if they can demonstrate hardship. Those under £2m can claim but must demonstrate hardship where there has been a failure to account by their solicitor.

The SRA has proposed excluding all claims from charities and trusts above the £2m mark, and simplify the test for those below that by requiring that they must show hardship.

The reforms would also stop barristers and expert witnesses from claiming on the fund.

A further change would be to explicitly set out circumstances when the conduct of the applicant may warrant a refusal or reduction in the grant – that is, where their own actions could have prevented the loss.

The SRA said: “Most people investing in high-return dubious schemes have access to good information and should bear some responsibility for their actions. We will take into account where people are more vulnerable and this might not be the case.”

In the press briefing, SRA chief executive Paul Philip said the size of some bogus investment cases could wipe out the fund. It was not there to underwrite poor investment decisions.

Mr Passmore stressed that the regulator’s ideas were not set in stone and it was keen to hear from the profession. The consultation lasts three months.

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