The Solicitors Regulation Authority is planning to cap pay-outs from the Compensation Fund in a bid to restrict multi-million payments. The regulator says its proposals will “strike the right balance between protecting clients’ money and making sure that the Fund remains sustainable for the future.”
The Compensation Fund exists to provide a safety net to the profession, and thereby maintain trust in the profession. It can protect clients from losses following dishonesty or theft by a solicitor, or when they cannot claim on the firms’ professional indemnity insurance. It is funded by contributions from law firms and solicitors.
However these contributions have increased significantly over the past decade, with an aggregate of £2.1m being collected in 2010/2011, but £25.6m in 2018/2019.
The SRA wants to cap the maximum pay-out at £500,000 and limit the total amount payable for groups of related claims. Some previous pay-outs have been far higher than the proposed limit. In the last eight years the fund has made individual payments of up to £3.9m, with most of the higher payments being made for stolen probate and mortgage monies, and damages.
In addition, the regulator is proposing that pay-outs are only made to recipients of a legal service from the solicitor involved. This means, for example, that a house buyer who lost money because of the dishonesty of their seller’s solicitor would not be eligible for compensation.
The SRA also wants to stop payments where an insurance policy has already paid out money.
Paul Philip, SRA Chief Executive, said: “The Compensation Fund provides an essential safety net for those who need it, helping to maintain trust in the profession when things go wrong. However, funding the scheme comes at a cost, which is borne by the wider profession and ultimately their clients.”
But the Legal Services Consumer Panel expressed concerns about the proposals. “Any reduction in consumer protection of this significance must be justified with evidence, and a thorough analysis of the risks and benefits,” said a spokesperson.
The SRA’s proposals follow its recent decision to drop plans to cut the minimum level of cover for solicitors’ professional indemnity insurance to £500,000. “Restricting pay-outs from the fund will make it more sustainable for law firms and will help to prevent costs escalating out of control,” said James Burgoyne, Director – Claims & Technical, Brunel Professions. “But the underlying questions are why the costs of the Compensation Fund have risen so sharply and now need such strict control, and why losses arising from an insolvency of an insurer are excluded. A key factor is the number of insolvent insurers over the past decade and the lack of insurance capacity wishing to become participating insurers. This is in turn linked to the breadth of the SRA Minimum Terms for Professional Indemnity Insurance, which are far broader than the policy cover required of other professions, and correspondingly expensive to back for an insurer.”
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