The Legal Services Board (LSB) has agreed to allow the Solicitors Regulation Authority (SRA) to maintain client protection arrangements that will permit alternative business structures (ABS) to remain in the Compensation Fund indefinitely. Originally, the provision was subject to a 'sunset clause' that expired on 31 December 2012. The Lord Chancellor will be invited to make an order that will remove that clause.
The Law Society has been concerned that the arrival of ABS firms may give rise to a very different set of risks from those that applied to law firms before the new regime. It may well be that the compensation arrangements that are suitable for traditional law firms may not be appropriate for ABS. Having said that, the Society recognised that there did need to be appropriate compensation arrangements in place and that it would not be possible to establish all the risks until the ABS market had developed further. Moreover, the SRA has indicated that it will be reviewing compensation arrangements as part of a 'root and branch' review in 2014.
The Law Society's view, therefore, was it would be most appropriate to extend the sunset clause until 31 December 2014 so that the SRA had sufficient time to review these arrangements, but there would still be an element of urgency to reach a decision.
While the LSB 'had some sympathy' for our position, it considered its recommendation to the Lord Chancellor should not be time bound in order to avoid a situation where there 'is insufficient information to make long term provision for compensation arrangements'.
The SRA is not currently in a position to express a preference for the long term arrangements for ABS compensation. It considers that it needs additional time to review the development of ABSs and understand the risks that may lead to compensation claims.
The Law Society encourages the SRA to ensure that it has sufficient processes in place to record accurate data about the types of claims made on the Compensation Fund and the type of entity generating claims. Some changes to the way in which data is recorded will be needed and it is essential that the SRA make any necessary changes immediately to ensure that its systems will provide the data required when it comes time to conduct its review. Our previous information requests for compensation fund claims to be broken down by firm size and type have not been furnished because the SRA does not record data in this way.
We consider it imperative that the SRA undertake this review as soon as reasonably practicable to provide certainty to the profession and consumers of legal services.
The Society has called for a comprehensive review of the Compensation Fund for some time now. This review should include consideration of the impact of ABS claims, the appropriateness of a single fund covering non-solicitor principals and regulated activities that potentially includes work outside of the scope of traditional legal activities. There is also a need to consider the impact of the SRA's recent decision to transfer the cover for non-applied firms, previously provided by the assigned risks pool, to the Compensation Fund. This has exposed the fund to a new type of claims relating to negligent acts. There is merit in examining whether the current management arrangements are fit for purpose in light of this expanded role.
Background
The LSB's decision and the Law Society’s response to the consultation is available at the LSB website:
View the response
A delegated legislation Committee will debate the Order for the House of Commons next week, on 13 November 2012. The Order has been referred to the Grand Committee of the House of Lords for debate on Tuesday 20 November.