Will the SRA’s proposed changes to ease the burden and cost of regulation on firms achieve their aim?
Andrew Hopper QC, a solicitor specialising in the regulation of the solicitors’ profession, warns that the changes could have unpredictable but potentially damaging consequences in terms of the professional indemnity insurance (PII) market.
This article was first published on Lexis®Library on 6 August 2014. Click here for a free trial of Lexis®Library. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
Report: SRA Board makes changes to ease the burden, LNB News 03/07/2014 110
Unnecessary regulatory barriers and restrictions will be removed following approval for changes to the Solicitors Regulation Authority (SRA) regulatory requirements. The reform programme will ensure regulation is properly targeted and proportionate to enable increased competition, innovation and growth, serve legal services consumers better and reduce unnecessary costs for regulated firms.
What are the key changes being proposed?
The key changes are:
a) a change in the minimum terms and conditions of professional indemnity insurance (PII) cover, reducing the minimum amount of cover from £2m (£3m for corporates) to £500,000
b) a new requirement that firms assess the level of required cover and purchase it
c) removing from the scope of the compensation fund any applicant/loser who/which is not an individual or micro-enterprise (so restricting claims to those by ‘consumers’, small businesses, charities and trusts)
d) increasing from £50 to £500 the amount which firms can pay to charity without express consent of the SRA, in dealing with residual client account balances (untraced clients)
Would the introduction of these proposals be a desirable development?
Item ‘d’ (above) is welcome as a reduction in bureaucracy—the limit has not changed for very many years. It also, by the way, saves a lot of SRA staff time in dealing with numerous unnecessary applications.
Item ‘a’ (with ‘b’) is portrayed as deregulatory and designed to reduce costs, so increasing access to justice (ie, firms with lower overheads will be able to do work for less—what would you guess!).
Item ‘b’ is sensible and firms should have been doing this anyway if there was any risk of exceeding the level of cover. However, the current limit was generally believed to be ‘enough’ for a small firm so it is another thing to worry about. Item ‘a’ is potentially disastrous and will not have the (apparently) intended effect. Low risk firms will already be rated accordingly. The reduction in minimum cover is predicted by every commentator other than the SRA to have no material effect on premiums. We do not know how they concluded otherwise and do not know what research they have undertaken. So the predicted reduction in overheads and hoped-for consequences will not happen, nor will firms actually save money, but will also potentially have to pay for top-up cover—which may be differently rated and, paradoxically, more expensive. We do not know, but uncertainty is bad for firms and insurers.
More importantly, lenders have already signalled that they would expect their panel firms to retain the current levels of cover and that they would remove firms who take advantage of a lower limit. They doubt the validity of the SRA’s research (again the details are unknown) suggesting that such a high percentage of claims will fall within the lower limit. The suspicion is that the SRA drew on out-of-date data.
The renewal season is already a nightmare for many small firms. Adding to the uncertainty makes life more difficult. The SRA doesn’t have Legal Services Board (LSB) approval but is planning this change to be effective for this renewal season. The impetuous rush to change without adequate research and with every indication that what they want will not be achieved is a matter for dismay. The SRA Handbook will, as a consequence of these changes, enter its 11th iteration in October (the 10th being only on 1 July 2014). Is it too much to hope for a short period of stability?
Item ‘c’ is another nail in the coffin of sole practitioners. This will exclude institutional lenders from the protection of the compensation fund. The prospect of sole practitioners remaining on lenders’ panels—already problematic—will recede.
Are the measures practical and capable of being effectively implemented and enforced?
In addition to the above, implementation will happen willy-nilly. Enforcement issues can be expected to arise in relation to the requirement to assess the level of cover. This will be another item on a checklist which the SRA supervisors will expect to result in a ‘policy’ for each firm. Firms will be required to demonstrate how the decision was made. If anything goes wrong we can expect it to be added to the list of possible allegations.
How will these changes affect solicitors?
A small gain for those firms tackling client residual balances. Some firms, probably few, will seek to take advantage of the lower limit of cover and actually save money. This is predicted to be ‘not a lot’ in terms of saving, if there is any at all. The insurance industry is basically saying it won’t make any difference.
Some may be unwise to reduce the limit of cover, others will be prevented from doing so even if they think it would be proper (by lenders or accreditation schemes). Another level of uncertainty will be added to the insurance renewal season. Further erosion of the role of the sole practitioner will occur. The SRA will not achieve what it has forecast, put forward as the fundamental justification for these changes.
Are there any trends emerging in the law in this area? How does this fit in with other developments in this area?
This is not particularly relevant with no material impact in the wider legal sense. This is about changes in regulation to no great purpose, with unpredictable but potentially damaging consequences in terms of the PII market.
The good news is that the SRA has been persuaded to think again about yet more intended changes, including abolishing accountant’s reports—which looks like a crowd-pleaser until you realise the downside. If it wanted to be generally ‘deregulatory’ try looking at the Accounts Rules and the agonising processes of ‘authorisation’ which require new firms—start-ups and spin-offs—to fill in so many forms and have so many ‘policies’ that you need a compliance consultant to complete them.
Interviewed by Nicola Laver.
What do you think? Is this ‘another nail in the coffin’ of sole practitioners? Let us know below.
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