Solicitors Regulation Authority s Consultation on reforming Professional Indemnity Insurance and the Compensation Fund

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Sharon Fleming
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1 Solicitors Regulation Authority s Consultation on reforming Professional Indemnity Insurance and the Compensation Fund

2 Professional Indemnity Insurance What is professional indemnity insurance (PII)? PII is insurance that covers civil liability claims arising from your work in private legal practice. These claims most commonly involve professional negligence. Why do you need it? The SRA rules require you to maintain qualifying PII. It increases your financial security. It serves the public interest; covering civil liabilities to ensure the public doesn t suffer uncompensated losses. It maintains public confidence in the integrity and standing of solicitors.

3 Proposed changes to PII What do the SRA want to do with PII? Reduce the minimum level of compulsory cover from the current 2-3m, to 1m for firms providing conveyancing services and 500k for everyone else. Exclude from compulsory cover corporate clients with turnovers in excess of 2m. Cap the total level of compulsory run-off cover at 3m for conveyancing firms and 1.5m for all other firms, in aggregate, over six years.

4 Definition of conveyancing services The SRA intends to define conveyancing services for the purposes of PII cover as: Dealing with transfers, conveyances, leases, contracts, deeds, grants, mortgages, charges, licences and other documents in connection with, and other services ancillary to, the disposition, acquisition or creation of estates or interests in or over land and the sale and purchase of companies whose primary asset is an estate or interest.

5 The SRA s case for change These current changes must be seen within the context of the SRA s broad liberalising agenda. The changes are a refinement of their proposals from 2014, which the Legal Services Board rejected. In the consultation document the SRA explains: We believe these changes will permit more flexible options for firms, helping to lower their insurance costs. We expect this to encourage competition and ultimately lead to lower prices for some users of legal services, assuming the market is working well and firms pass these savings onto the users of legal services.

6 Current state of the PII market The market for solicitors PII has never been so competitively priced as it is now. Less money was taken in primary layer premiums last year than under the final year of the old mutual fund. But, the cost of excess layer cover has increased in the last months, because of several large losses that breached the mandatory minimum level of cover. Consequently, top-up insurers such as Brit and Channel Syndicate left the market, while others raised prices. There are now only a handful of insurers offering cover for 3m over 2m, or 2m over 3m.

Million pounds Value of solicitors PII (1997-2014) Year Source: https://hyperionprod.blob.

7 Million pounds Value of solicitors PII ( ) Year Source:

8 The SRA s research The SRA says that 98% of claims will be under 580k. This is based on old data, from the period The data covers 74% of the market. But we have serious concerns about the age and quality of the SRA s data: It omits insurers such as Quinn, Belva, and Enterprise, where claims payments contributed to their demise. Since 2014, there has been a huge increase in Friday afternoon account fraud, and cyber fraud more generally. Since 2004, the average London house price increased by 122%, from 219,000 to 486,000.

9 The hoped for effects of the changes The SRA believes that the changes will result in savings of 9-17% in the cost of solicitors PII. However, our annual PII Survey shows that firms spend an average of 4.8% of turnover on PII. So if a 17% cost-saving were achieved in PII, and firms chose to pass on that saving in full, 17% of 4.8% could translate into a discount for clients of just 0.8%, which is unlikely to galvanise people to access legal services: Sample legal services Mean price of legal services in 2017, according to LSB Mean price of legal services passing on 17% saving on PII Projected savings for clients A sale of a freehold property An uncontested divorce requiring a full legal service An individual standard will

10 The likely effects of the changes Premiums will probably increase for most firms. The placement of insurance and claims process will become more complicated, with greater likelihood of exposure to an event that falls outside of cover. The vague definition of conveyancing services will create a broad exclusion clause that insurers may be able to use to decline claims from firms insured with the basic 500k MTC cover. More solicitors will be held personally liable. More clients will suffer uncompensated harms. The reputation of the profession will be damaged.

11 The scale of reduction in cover This graph shows the 50-83% reduction in minimum indemnity limits, by type of firm and type of work:

12 Is it worth the risk? We do not believe that the likely increased costs and risk to consumers and solicitors alike are justified in any way by the marginal savings the SRA hope to achieve. The SRA s own Research on Consumers Attitudes towards the Purchase of Legal Services revealed that: When choosing a provider of legal services, consumers are generally making an assumption that the provider will have appropriate expertise and qualifications, ensuring that they are able to offer a professional service. Whilst protection is not actively considered, basic consumer protection appears to be assumed at some level. Price appears to be less important for many, but clearly does play a key role for some.

13 The Compensation Fund The Compensation Fund is a discretionary fund operated by the SRA to which all solicitors contribute, via a levy added to the practising certificate fee. The SRA s powers to operate the fund are set out in statute. It was established by Parliament in The purpose of the fund is to provide a safety net for risks that PII is unable to cover, since a rule of public policy prevents anyone from insuring against his or her own dishonesty. It is therefore a fund of last resort for clients who are victims of personal dishonesty of solicitors or hardship due to a solicitor's failure to account for monies.

14 What does the Fund cover? According to the SRA Compensation Fund Rules 2011: 3.1 The primary object of the fund is to replace money which a defaulting solicitor or a defaulting practitioner's employee or manager has misappropriated or otherwise failed to account for. The applicant need not necessarily be or have been the defaulting practitioner's client. 3.2 It is also an object of the fund to provide compensation in respect of the civil liability of a defaulting practitioner or a defaulting practitioner's employee or manager who in accordance with the SRA Indemnity Insurance Rules should have had, but did not have, in place a policy of qualifying insurance against which a claim could be made in respect of such civil liability.

15 Who can claim from the Fund? A claimant must be: an individual; or a business, company or association with a turnover of less than 2 million; or a charity with an annual income of less than 2 million (unless it can show that the beneficiaries will suffer hardship); or a trustee of a trust with an asset value of less than 2 million (unless he or she can show that the beneficiaries will suffer hardship). Claimants may be asked to provide evidence of hardship.

16 Eligibility to claim from the Fund? If a claimant has suffered a loss which occurred during the normal work of a person or firm regulated by the SRA, they may be eligible to claim In order to make a claim they must be able to show: they suffered loss because of the regulated person or firm s dishonesty; or they suffered loss and hardship due to the regulated person or firm s failure to account for money they have received. The SRA will decide whether a would-be claimant is eligible to make a claim, up to a maximum value of 2m.

17 Proposed changes to the Fund What does the SRA want to do with the Compensation Fund? The SRA wants to redesignate the Fund as a hardship fund. Eligibility would be limited to individuals who have: acted prudently; and meet financial hardship tests (including having household assets of less than 250k). The maximum payments would be reduced by 75%, from the current level of 2m to 500k.

18 Our response to the SRA s proposals The SRA does not provide sufficient data on the makeup of the claims it receives, handles, and closes in the course of a year, nor the proportion of claims that arise just from dishonesty, for us to support the proposals. We would ask that, for each proposal, the SRA should publish: how many claimants would be adversely affected; and what costs and savings would result. This would more easily allow us to comment on the intended reforms.

19 Our concerns We do not believe the SRA has the power to change the purpose of the Fund to a hardship fund. We also worry that the 250,000 household asset bar could have perverse consequences: A 2,000 claim from a person with household assets of 249,000 would be allowed, while a 500,000 claim from a person with household assets of 251,000 would not. A would-be first-time buyer on a relatively low income, who has been defrauded by her solicitor, might have her claim rejected on the grounds that she was living with her parents while she saved for a deposit, and their household assets are more than 250,000.

20 Conclusion The current system of consumer protections is not perfect, but typically it is fairly priced and works well. We do not believe that the changes the SRA are proposing will reduce prices or improve access to justice. The SRA s proposals are likely to: Create greater risks for clients and solicitors. Be more complicated, time-consuming, and costly. Undermine trust in the profession. We encourage local Law Societies, firms, and individual members to send their responses to the SRA, by 15 th June:

21 If you have any questions, please contact Simon Thomson Policy Adviser Professional Indemnity Insurance

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