Recent developments in choice of regulator for Solicitors
Solicitors and other legal service providers should be aware of three recent developments that may affect the way they buy Professional Indemnity insurance in the future, says Brian Balkin, Senior Vice President in Lockton's Solicitors team.
The issues highlighted by Balkin include the choice of regulator, run-off provisions and the choice of insurer.
SRA Consultation on Choice of Regulator - PII implications
A just-closed consultation by the Solicitors Regulation Authority (SRA) entitled 'Removing barriers to switching Regulators', states that the SRA is proposing to amend its PII requirements for firms who leave its regulation and switch to another LSB approved regulator. Under the current regime, if this happens a six year period of run-off cover is triggered with a premium payable for that. Under the new regulator, it may be that the PII put in place will also provide cover for matters completed whilst under SRA supervision. The SRA proposes to remove the requirement for run-off cover to be triggered in this event.
Barriers to switching regulator
When it became possible for firms to choose a different regulator, it was anticipated that there would be significant movement but this has not proved to be the case. For many legal service providers it is not a simple matter of choosing a new regulator; for example a firm would only be able to move to the Council for Licensed Conveyancers if they carry out conveyancing and/or probate work and no other types of legal work. The CLC currently regulates only 230 entities. The Institute of Legal Executives has a wider remit, including litigation, probate and immigration services as well as conveyancing. However both these regulators require similar PII cover to that imposed by the SRA Minimum Terms and Conditions, including six years run-off cover.
Legal Services Board review restrictions on choice of insurer
In a separate, but just as important development the LSB is conducting a thematic review of restrictions on choice of insurer. It begins to look at the differing models available, the open market one as in England & Wales, the mutual model as used to be the case with the Solicitors Indemnity Fund and the Master Policy model used in Scotland. They state that PII “is an important but costly part of doing business for regulated legal practitioners, who have expressed concerns about that cost in previous LSB research. How PII is supplied - and any regulatory restrictions on practitioners' choice of PII supplier - are likely to have implications for practitioners, consumers and approved regulators (ARs)”. Whilst acknowledging that PII is a complex matter and asking ARs to monitor and review arrangements regularly to ensure they are fit for purpose, the final paragraph says that more work is needed on PII and specifically states that this should be around run-off cover ”which may be required on exiting a market.”
Considering changing regulator?
Now obviously these developments tie together. Lockton believe that any legal service provider and the PII insurance arrangements put in place by any AR must have an eye to client protection…. The Law Society's Chief Executive has also said that “'The Law Society supports the SRA's aim to encourage a competitive market by removing unnecessary barriers to switching regulator - but this must not be at the expense of client protection. We are concerned that the SRA's proposals could leave existing and past clients of firms that switch regulator without appropriate cover.”
In its consultation paper on the choice of regulator, the SRA states that any waiver of the rules on run-off would be on a case-by-case basis, and that they anticipate that as the regulatory arrangements of all ARs are approved by the Legal Services Board, they can be confident that all arrangements will be appropriate.
What cannot be allowed to happen is a drive to the lowest common denominator, a direction the SRA seems to be headed in another consultation where it proposes to reduce run-off period to two years. This would also potentially leave both clients and Partners uninsured in the event of a claim outside that short period. The focus is on a more flexible market and they envisage lawyers working in 'alternative legal services providers' which will not be required to hold PII cover. Whilst this is an inevitable move if the cost of legal services – particularly unregulated services – is to be kept down, there is a significant risk that clients will not understand these changes. Considerable effort will be needed in ensuring that the public is made aware of the different providers and the potential consequences of using an unregulated provider.
The question for partners and directors of law firms, whether regulated by the SRA or another body, must always be 'would we be covered?' Would your clients be protected if the worst happened and someone in your firm was negligent or you were defrauded by criminals? And will this cover extend to any claims discovered after you have ceased to practise? Whatever the conclusions of the SRA and LSB, the purchase of PII cover is about more than compliance with regulatory requirements. It is about client protection and ultimately about protecting yourselves. Whether you are retiring or simply seeking a new regulator in the changed legal market, you want to do so with confidence that you will not receive an unexpected demand for payment in four or five years time.