SRA Proposals for PII Reform

Published 23 March 2018

The SRA has now launched its long awaited consultation on reforming the Solicitors Minimum Terms & Conditions (MTCs) and the Compensation Fund. In conjunction with the consultation it is anticipated that the Participating Insurers' Agreement (PIA) will also be updated to reflect modern day working practices and to remove any overlap or duplication between the MTCs and the PIA.

Overview

Nearly 4 years ago, in May 2014, the SRA decided to embark on a major programme of regulatory reform with the aim of reducing regulatory burdens for law firms whilst maintaining important protection for consumers.

The 2014 proposed changes to the Minimum Terms were:-

1. a reduction in the level of mandatory cover to £500,000
2. the introduction of an aggregate limit on claims
3. the requirement for compulsory cover for claims by individuals/SMEs/trusts & charities
4. a reduction to run off cover to a minimum of 3 years
5. a requirement for firms to assess the level of cover appropriate to their firm beyond the minimum

At the time the SRA were heavily criticised, not only because of the timing and limited opportunity for key stakeholders to respond, but also because of concerns that it was moving too quickly, had not undertaken any proper impact assessment or gathered supportive evidence. As a result 3 of the 5 proposals were deferred, the LSB rejected a reduction in the level of cover to £500,000 but approved a new Outcome to be incorporated into the Code of Conduct requiring self-assessment by firms as to the level of cover appropriate for them.

July 2015 saw the SRA publish another consultation discussion paper on reforms & protecting clients' financial interests. The SRA's intention was to use the feedback to inform proposals for a further consultation in early 2016.

The proposals were more wide ranging than those set out in 2014 and proposed:

1. only covering claims by consumers
2. an aggregated limit on cover, rather than any one claim
3. £500,000 limit on cover – to include Claimant costs
4. a reduction in run off cover to 3 years from 6 and a hardship fund for smaller firms deterred from closing
5. removing cover for non-disclosure and other policy breaches
6. also removing cover for partner fraud and
7. an extended indemnity period

Again the consultation attracted criticism including the lack of additional evidence beyond that available in 2014 to support the proposal. As a result no doubt of criticisms, the SRA announced in November 2015 that it would again delay its expected consultation on MTC reforms.

Key proposed changes to the MTCs

The Consultation announced today proposes the following key changes:-

Reducing the claims limit: Currently firms must have minimum cover of £2,000,000 rising to £3,000,000 for firms with certain structures. The SRA propose to reduce this to £500,000 for all firms apart from claims for conveyancing services. Some 98 percent of historic claims in the 10 years of historic data which the SRA say it has evaluated would have fallen within this limit.

A higher limit for conveyancing: Those firms carrying out conveyancing services would need a minimum of £1,000,000 cover, reflecting the higher risks of working in that area and making sure the public are protected where problems are most likely.

Flexibility around who the cover should protect: The SRA see no need for the MTCs to include cover for financial institutions, corporate and other large business clients. It also proposes to introduce a conveyancing component in insurance so that only firms that need cover for this work are required to buy it.

Changes to run-off: A six-year run-off period will remain but with caps of £3,000,000 for firms that need conveyancing services cover and £1,500,000 for other firms. The SRA consider this will make it easier for firms to close properly and reduce the risk that solicitors delay retirement unnecessarily.

Changes to defence costs arrangements: to enable more flexibility for firms and insurers. Defence costs will however continue to be in additional to the level of indemnity provided.

There are no plans to include a total cap for levels of claims made during a single indemnity period, exclude cover for claims arising from cyber/fraud or criminal activity and which results in losses from solicitors' client accounts, extend exclusions for dishonesty to stop innocent partners claiming under the policy or alter insurers' obligations where firms do not pay the excess.

Key Changes to the Compensation Fund

Eligibility to Claim: the SRA propose to narrow eligibility to only those people that need the most protection. This would mean that the very wealthy (defined as individuals with net household financial assets above £250,000), large charities, businesses and trusts with income / assets of more than £2,000,000 and Barristers and other experts would not be able to make claims on the Fund.

A reduction to the maximum payment: Currently the maximum sum receivable from the Fund is £2,000,000. The SRA propose to reduce this to £500,000.

Conduct of the Applicant: the SRA proposes a more robust approach to ensure the Fund is not available to those whose own actions could have prevented a loss. They give examples of seeking to exclude applicants looking to make very high returns from a dubious investment take steps to check the legitimacy of the scheme and any products, as well as the solicitors’ involvement in them.

The consultation is open from 23 March to 15 June 2018.

Click on this link to access the full consultation proposals