Claims lodged over dishonesty and default by solicitors more than triples to £157m

Interventions: the SRA closed down 90 firms in the year to June

The value of compensation claims lodged as a result of dishonesty and other default by solicitors has more than trebled to an astonishing £157 million, Legal Futures can reveal. The rise goes hand in hand with a continuing rise in the number of law firms closed down.

Figures from the Solicitors Regulation Authority (SRA) show a dramatic increase in open claims against the Solicitors Compensation Fund in the year to June 2010, which were at £48 million 12 months earlier, itself a high figure compared to previous years.

The SRA intervened in 90 law firms during the year, up 22% on 2008/9 and 43% on 2007/8. However, dishonesty was only suspected in 27% of interventions, compared to 35% the previous year. The 90 firms comprised 66 sole practitioners and 24 firms of two to four partners.

The fund compensates people who have suffered financial loss due to a solicitor’s dishonesty or failure to account for monies received. It mainly covers default by sole practitioners and small partnerships, as indemnity insurance will cover claims against partnerships where there is an innocent partner. It provides cover of up to £2 million per claim, and clients have up to a year to make a claim, which usually happens when the SRA closes a firm down.

When this occurs and money cannot be easily identified in client accounts, a claim is made against the fund. The SRA currently holds £64 million of unclaimed client money from interventions in so-called statutory trusts – some of which is from recent interventions, but some is from dormant cases.

A large number of claims against the compensation fund are rejected for various reasons, and often those that are accepted are not paid in full.

The £157 million is made up of nearly 3,000 claims currently under investigation. There was a major spike in claims for general client money in the first half of 2010, which is likely to have been caused by the closure of Cheadle and Birmingham firm Wolstenholmes, although as yet there has been no definitive statement of the problems at the firm.

There has also been a huge rise this year in the number of claims relating to stamp duty land tax, with nearly 471 made in the first half of 2010, compared to 107 in the second half of 2009.

In a statement, the SRA said that at the end of June 2010, the net cash assets of the fund were in excess of £49 million, which, given that “a large proportion of claims do not result in grant payments… is far in excess of expected net grant payments in the next 12 months, which allows the SRA to remain confident that the fund can continue to meet the increased demand”.

The SRA is levying £10 on individual practitioners and £120 on firms that hold client money as their contribution to the compensation fund this year. In a statement the SRA said these figures were set against the backdrop of the rising numbers of interventions and increasing claims during the second half of 2009. “The ongoing increase in claims received was not completely unexpected and has therefore been considered when setting the contribution,” it said.

The SRA said changes in the rules regarding the treatment of dormant statutory trust account balances in 2009 had also given rise to an additional inflow to the fund. “A significant proportion of claims paid may also be recovered from the statutory trust accounts through the fund’s rights of subrogation, meaning the compensation fund contribution is not the only inflow into the fund. These recoveries and inflows resulted in a balance in the Fund substantially above the minimum reserve level set by the [SRA’s] financial protection committee. The lower than usual contribution in 2010/11 reflects this.”


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