Northamptonshire Law Society
Constituency Council Member’s Report March 2020 Consultation on changes to the Compensation Fundi -deadline for submission of responses 21 April 2020. On the 21st of January, the Solicitors Regulation Authority (SRA) launched a further consultation on planned reforms to the Compensation Fund. In 2018, the SRA consulted on changes to the Compensation fund and changes to Professional Indemnity Insurance (PII). At the end of 2019, it announced it would abandon its proposals to change PII. Any change to the Compensation Fund has the potential to impact disproportionately on sole practitioners and twopartner firms, who are most vulnerable to concerns that clients may lose money as a result of a lack of insurance or dishonesty. This is not because there is any evidence that there is a greater likelihood of dishonesty by such firms but because it is impossible to insure against your own dishonesty. In a two-partner firm, it may be difficult to persuade insurers that you are not implicated in the dishonesty of your partner. Partners in larger firms can usually rely on their professional indemnity insurance in the event of dishonesty by a fellow partner or employee. ] Confidence in smaller firms could be damaged by any change in the availability of compensation. However, such changes could impact on every solicitor and every firm if the reputation of solicitors were to be tarnished by tales of clients who lost money because the safety net of the Compensation Fund was reduced. The Compensation Fund is a discretionary Fund that will make payments to people who has suffered a financial loss because of the dishonesty, or because the regulated person or entity has failed to account for client money that they received. The Fund can also make payments because a regulated person or entity is unable to make good a loss for which it is liable because they have not taken out insurance. After initially indicating that clients of the new style freelancers (introduced on 25 November 2019) would not have access to the Compensation Fund, the SRA did an about turn after intense lobbying from consumer groups and agreed that such clients would be able to claim, although it has yet to announce what contributions freelancers will make to the fund. Controversially, some years ago the SRA also started to use monies in the Compensation Fund to pay for interventions rather than utilising monies raised by collecting the practising certificate fee. This distorted the cost of the Compensation Fund. In the announcement of a further consultation, the Gazette stated that, ‘the Solicitors Regulation Authority will seek to end multi-million payouts through the compensation fund in 6
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the midst of soaring burdens on the profession to prop it up.’ Predictions about the cost of the Fund in any one year are notoriously difficult to predict. In 2015, the Gazette reported payouts as ‘soaring’ but just one year later, in 2016, it stated that payouts, ‘tumble by almost 25%’. If we look at the cost to the profession, contributions for firms and individuals rise and fall each year depending on predicted claims on the fund. The most expensive year ever was 2018/19 when the firm contribution was £1,680 and £90 per individual although contributions significantly reduced for 2019/20. We are told that the City resent paying for a fund they will never call on but to put it in perspective, the cost for one of the very largest City firms employing say 1,000 solicitors was £91,680 in 2018/19, falling to £61,150 last year- a very modest sum to protect the reputation of the profession at home and abroad? The SRA are revamping the reforms suggested last time and refining others. One of the most controversial was the plan to limit individual claims to £500,000 (currently limited to £2 million) which the SRA in its review of consultation responses accept there was, ‘little support for’. Nonetheless it is again proposing that the limit be introduced. It acknowledges that around 75% of claims are for less than £5,000 but it does not address the potential resulting loss of confidence by the public in small firms and the profession as a whole. The SRA confirms that it also proposes to exclude experts and barristers from claiming monies lost due to dishonesty and extending to others for example, the opposing party in a legal proceeding such as spouses in a divorce matter where the other solicitor is holding and then steals the money set aside for a financial settlement.
