Lockton chaired a Forum with representatives the SRA, Law Society, Insurers and the solicitor profession, to discuss the SRA consultation proposals on the future of Solicitors Professional Indemnity.
The SRA Consultation addresses 5 main issues:
- Reducing the level of mandatory PII cover to £500,000
- Introducing an aggregate limit on claims
- Providing mandatory cover only for claims by individuals, small and medium-sized enterprises
- Reducing run-off cover to a minimum of 3 years
- Amendment of the Code of Conduct to require firms to assess the level of cover appropriate to their firm.
Rationale for the Consultation
Crispin Passmore opened the Forum, for the SRA, with a clear exposition of the rationale for the various recent consultations. While set in the context of balancing the need for protection of consumers (particularly smaller, weaker consumers) with the need to reduce the burden of regulation on smaller firms, the clear emphasis was the importance of increasing access to justice.
Three out of five businesses do not get legal advice - the reason being cost, he explained. The current system of regulation (of which the compulsory PII regime is part) is costly - and a cost which he argues ultimately borne by consumers.
While tacitly acknowledging that the timing of the consultation this year was not ideal, Pasmore suggested that a 4 week consultation period was perfectly adequate - and that reform had to start somewhere.
Passmore placed particular emphasis on the consultation proposal that firms should assess the level of cover suitable for their needs - in a move away from the 'one size fits all' approach which has been much criticised by the profession. This was broadly supported in principal, though Amy Bell, representing the solicitors group QualitySolicitors, expressed concern about the ability of smaller firms to manage this effectively, given already overstretched compliance requirements.
Timing & Speed of Consultation
Jenny Screech, speaking in her capacity as Legal Professions Manager at Zurich Insurance, welcomed the fact that the MTC wording was back on the agenda, but expressed greatest concern over the timing and speed of the consultation. The lack of time for detailed discussion of the proposals was perhaps the issue that gave rise to most criticism across the board.
While some proposals 'could be meaningful and attractive' according to Des Hudson, Chief Executive of the Law Society, they need proper time for discussion. The lack of clarity regarding what proposal may be implemented and when was identified as a risk for solicitors in the run up to renewal, particularly as it increases the chance that firms may be scrabbling around to obtain cover in the final weeks before renewal formally concludes on 1st October.
No reduction in premiums
Screech seemed to express the view of many when she described the SRA consultation's underlying premise as 'fundamentally flawed' if its aim was to deliver the reduction in premium sought be the SRA.
While the majority of claims settled by Zurich according to Screech were still under £100,000, the sheer volume of claims and exposure to 'sideways claims' as much as the increase in 7-figure settlements meant that insurers were operating in 'a considerably challenged market'. Therefore the proposed reduction in compulsory cover to £0.5m would not significantly reduce firms premiums.
Following up on the subject of costs, Hudson challenged the SRA contention that the proposals would have any real impact on access to justice - even if firms did experience a reduction in premiums, given that PII premiums account for only a small % of firms costs in comparison to premises and staff costs. Steve Holland (Lockton) reflected on the fact that premiums across the profession as a whole were significantly cheaper that the Solicitors Indemnity Fund, and around half the cost (as a percentage of turnover) of the predecessor Master Policy. He was concerned that the costs may simply be displaced in a series of unforseen consequences of the consultation proposals - while leaving clients and solicitors potentially more exposed.
Restriction on Claims by Lenders/Large Organisation
The SRA's goal is to balance protection of the consumer with supporting a healthy legal services market. Julian Sampson of TWM Solicitors, himself a Residential Conveyancing Partner, reminded the audience that Lenders were also clients, with legitimate interests to protect. It is his belief that large commercial clients will continue to be able to determine the terms on which they engage solicitors, and this commercial reality will drive the PII requirements for the majority of firms. The CML have already made it clear that they would restrict panels to firms that have 'adequate' insurance - and their response to similar consultation proposals four years ago, quoted by Sampson, suggests that they could implement a 'more intrusive' review regime, move towards separate representation, and/or may dispense with the services of solicitors altogether.
Run-off
While the exact figures were debated, the consensus was that the majority of claims after a firm has ceased, arise in the first 3 years following closure. The SRA suggested that a reduction in compulsory run-off to 3 years might assist 'mutualise risk', and also decrease the percentage of unpaid run-off premiums.
Looking forward
Insurers do not see anything in the current proposals that will significantly reduce their exposure, and therefore premiums. Jenny Screech for Zurich considered both the suggested £500,000 minimum limit of indemnity, and the proposed £1.5m aggregate cover to be far too low. She was, however, keen to see insurers given some freedom to determine their terms of cover. She cited the example of Ireland, where insurers can exclude liability for claims by financial institutions - currently the source of approximately 25% of all solicitor claims by value in England & Wales. She also would like to see insurers given the ability to decline cover for dishonest non-disclosure on proposal forms, and the reduction of the requirement to pay excesses not honoured by the client.
For the Law Society, Des Hudson had three wishes:
- For the SRA to be bound by the 'Better Regulation Principles' (which Hudson contended would have required a longer timeframe for the consultation)
- Claims Managment Companies to be outlawed
- For smaller firms only: for OFR to be disapplied and replaced with a clear, simple set of rules.
The Consultation ends tomorrow. To have your say, submit your response to the SRA online, or by post before the deadline passes.
(Lockton's Forum on the Future of PII was held at Lockton's London Offices on June 16th 2014, with a panel comprising: Crispin Passmore, Executive Director of Policy at the SRA; Des Hudson, Chief Executive of the Law Society; Jenny Screech, Legal Professions Manager at Zurich Insurance; Steve Holland, Solicitors Practice Group Leader at Lockton; Julian Sampson, Partner at TWM Solicitors; and Amy Bell, Risk & Compliance Manager for QualitySolicitors. Neville Miles, Partner in Lockton's Professions Team, was in the chair)