SIF - SPG response to the SRA

028

SIF - SPG response to the SRA

This is a response on behalf of the Sole Practitioners Group to the request set out in the SRA discussion paper for any views we may have in response to the issues highlighted in that paper.

1. The SPG welcomes the SRA confirmationof the announcement of 4 July 2022 thatSIF cover would continue until September2023 on the basis of the SRA agreeing tounderwrite the potential liabilities of SIF Ltdto a maximum of £6 million, on the basis thatin the unlikely event of this undertaking beencalled on the SRA would recoup those fundsthrough an indemnity contribution fromthe profession.

2. Whilst the SRA’s agreement to do that cannotrender the SRA morally or legally bound bythat arrangement as a precedent for thefuture, in practical terms the fact that theSRA have agreed to provide that indemnity,reflects the broad terms of the arrangementagreed and proposed in principle by theprofession through the Law Society.

3. This proposal is to the effect that the SIFindemnity structure should continue but thatif additional funds are required to supportit, then the profession would be preparedto pay those funds. On the basis that thisindemnity would continue to be providedon a statutory basis, the recoupment would

have to be under the powers of the SRA todo so. Accordingly, whilst the SRA cannotbe bound by what it has agreed to do foran extension of one year, it will make itextremely difficult for the SRA to argue thatsuch an arrangement should not continue inthe future.

4. The SPG welcomes and broadly accepts theSRA comments under the:

“Case for Future Consumer Protection”.

5. These comments confirm that the SRAhas reviewed its initial analysis prior tothe 2021/22 consultation in the light ofother available evidence about potentialconsumer detriment, including “consumerresearch commissioned by the SRA andothers”. It is unfortunate that there was noconsumer research before the 2021/22 andthe reference to research commissionedin addition to the SRA by “others” is noted.We are not aware of any other consumerresearch commissioned except that providedby the SPG, to which we presume thereference is intended to be made.

6. The law provides for negligence claims to beeffective after six years if certain criteria aremet. There can therefore be no argumentfor making a distinction between pre six yearclaims and post six year claims. Any insurancecover in the normal sense would continueover that whole period of entitlementregardless of when a claim was brought.7. It is agreed that the number of claims may besmall but the impact both on former clientclaimants and of course on the solicitorsagainst whom a claim is made will besignificant. It is hoped that there will be nodifficulty about the Board deciding that someform of protection should be maintained.

8. The real question to be addressed at thispoint is under the heading of:

“Options for Providing Future Consumer Protection”.

9. The three potential proposals appear to beas follows.a) The retention of the current SIF scheme

operated by SIF Ltd

b) An indemnity scheme within the SRA,which the SRA says it takes the view islikely to be more cost-effective than theretention of SIF Ltd

c) A discretionary arrangement similar to the compensation fund thereby effectively incorporating claims into the existing compensation fund.

10. Firstly, it can be said that if a decision is made to continue protection, then there is no justification, in the light of the agreement of the profession to support the arrangement, to limit it to a discretionary scheme. The public will not understand why it should be so limited and the profession have paid a large sum of money into SIF Ltd to provide the continued protection, which will have the subsidiary benefit of providing the factor of certainty as to cover and protection which is all-important to the profession. The SPG anticipate that the vast majority of your future consultees will be against any proposed compensation arrangement.

11. That leaves options A and B, the choice between which really seems to come down to the proportionality of cost of funding for the two respective arrangements.

12. In respect of option A - the continuance of SIF Ltd - the costs are available as far as can be ascertained. The SPG argues that these costs have not been properly interpreted from the original Willis Towers Watson report in arriving at a figure of £2 million plus per annum. That figure did not take into account investment income from the current £30 million of funds which must average out at least £500,000.

13. More importantly, the Willis Towers Watson report was written before it was appreciated that the profession would be prepared to support the SIF Ltd with any shortfall that it might suffer. It was the then need to provide appropriate reserves within the SIF Ltd which required the application of the Willis Towers figures. If those reserves are not needed the contribution required will reduce dramatically.

14. What is not clear at the moment is Firstly the response to the financial report produced by Honeycomb in respect of the Willis Towers Watson report as to the parameters upon which the existing WTW report was based. Secondly the availability of any comparative figures between the option of continuing SIF Ltd, on the one hand, and the cost of bringing it under the SRA preferred option of a new consumer protection arrangement within the SRA, on the other hand.

15. The original SRA preferred option of closing

spg.uk.com

029

the fund was written without consumer research. It will be again unfortunate if any further decision was made only on an assumption that the new consumer protection arrangement within the SRA would be more cost-effective and at a cost more proportionate to the benefits of the protection provided.

16. In the case of either scheme it must be clear that the existing funds of SIF Ltd will be ring fenced in connection with the indemnity scheme.

17. In the case of a scheme brought in house to be managed by the SRA, it appears that, as with the current compensation fund scheme, its administration will be subcontracted out to a third-party and therefore bringing the scheme in house to the SRA would be tantamount to continuing the scheme through SIF Ltd.

18. It is appreciated that it could be argued that there may be economies of scale, but the existing compensation fund scheme, operated on a discretionary basis, and the proposed indemnity scheme, operated on an indemnity basis, would be operated on completely separate principles. To link the administration of the two would cause potential confusion and lack of confidence in the indemnity scheme particularly in the ring fencing of the funds available from SIF Ltd. Any financial appraisal of the two proposals needs to take this factor into account.

19. The profession is obviously concerned at the existing failures by the SRA to firstly obtain consumer input into its original preferred option to close SIF Ltd and secondly the unexplained differences between the WTW report and its costs and that of the Honeycomb report. SPG members believe the profession would not wish to see the arrangement which has so far worked, without any significant diminution of the existing fund, to be changed on the basis of an assumption, without the best possible assessment of the benefits of a change set against the disadvantages.

20. The SPG is sure that everyone will agree that there are opportunities within SIF Ltd to save costs, particularly if the company is going forward into the long-term future with indemnity from the profession, rather than operating on an imminent closure basis. The profession has confidence in the existing arrangement which has given its clients and

its members protection and would not wish to see a significant change for the sake of change based on an assumption that a new arrangement would be significantly preferable.

21. Accordingly, it is entirely agreed that any further consultation must be on the basis that such assessment is one which can be accepted by the representatives of the profession, before it is circulated for the members of the profession and others to make a meaningful response.

22. It may be that in the preparation of such an analysis the right answer will become so obvious that there can be a clear recommendation to the profession and those concerned of a preferred, and indeed agreed, way forward for the post six year run-off indemnity.

23. On the assumption that the Board confirm the need to go forward on an indemnity basis, all parties are now at a position where the decision must be based on facts, which need to be ascertained and agreed as far as possible, and not on political or personal preferences.

24. The SRA will have received representations about the potential conflict-of-interest which may arise from the SRA’s involvement in running what is and indemnity fund based on a contract between the client and the solicitor as opposed to running a discretionary fund based on the need to support clients who have not been covered. In this case all clients will have been covered by their contractual arrangement with their previous solicitor.

25. In those circumstances there could well be a

situation where the settlement of a claim underthe direct in-house control of the SRA conflictswith an issue in which the SRA are involved asregulator. There should be no risk of any suchconflict-of-interest in the SRA’s position asregulator and any cost factors should not beused as an argument to take that risk.

Other issues

Protection for large corporate claimants26. On the basis that the profession is arguingthat the fund should not be akin to thecompensation fund, there is no argumentfor excluding claims by large corporateclaimants. Any indemnity claim will be limitedto the amount of insurance which is normally£2 million. The existing fund presumably doesnot cover any top up insurance.Claimant’s costs27. On the basis this is an indemnityarrangement, costs would have to be dealtwith in the normal way with SIF Ltd or itsagents settling matters with the minimum ofexpenditure on costs.Recovering claim payments28. On the basis that this scheme continuesto be an indemnity, any excess under theoriginal policy which is normally modest (inthe hundreds of pounds) should be recoveredfrom the solicitor who is liable. This should notcause much difficulty to solicitors in respectof demands for payments of policy excess.

Clive Sutton Honorary Secretary SPGOn behalf of the Sole Practitioners Group

spg.uk.com