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SRA consultation on minimum compulsory PII cover: Law Society response

18 June 2014

The SRA's proposals are to:

  • reduce mandatory cover to £500,000
  • introduce a cap for insurers in any one year by an aggregate limit on claims (amount to be determined through the consultation)
  • limit compulsory cover for claims requirements to individuals, small enterprises, charities and trusts but exclude large clients, in particular lenders and the financial institutions
  • reduce the run-off cover from six years to three
  • introduce a new regulatory requirement that each firm assess the level of PII cover that is appropriate for its work
  • announce changes for early August for implementation on 1 October 2014.

The Law Society is strongly opposed to the proposed changes. The rushed timetable to implement on 1 October 2014 risks unacceptable chaos in the market and significant irreparable damage to consumer protection and to the reputations of the regulator and the profession. Delaying implementation will not be sufficient to address these concerns.

The proposals need to be reconsidered from scratch, supported by proper evidence.

While elements of the professional indemnity insurance (PII) regime would benefit from reform, the proposals risk creating considerable consumer detriment and additional cost for an unspecified, unquantifiable benefit that might arise from an aspiration for greater competition and reduced costs for firms.

The current client financial protection arrangements provide assurance and certainty for most firms and unrivalled protection for the consumer. It is unheard of for individuals to be left destitute or without some level of redress if a solicitor is negligent or dishonest.

Lowering the mandatory levels as a starting point for risk-based differential regulation threatens to expose firms to greater risk, to disrupt that consumer assurance and to introduce a serious element of uncertainty and risk for the more vulnerable end-consumer - for whom the redress process may be lengthy, costly and not guaranteed

Firms will have to purchase a package of differentiated top-up insurance products outside the current minimum terms and conditions (MTC) PII package tailored to their business model. The anecdotal evidence is that the cost of the additional insurance products, assuming these are created and available at a competitive price, will inevitably be greater than the current cost of inclusion in the current homogenous MTC package.

We are concerned the proposal will have an adverse impact on consumer choice and may force many smaller firms from both the conveyancing market and potentially from areas of probate.

No impact assessment nor equality or diversity assessment has been carried out and it seems that lenders and the insurance industry have not been consulted.

Given the likely impact of these changes, we urge that the proposals should not be introduced and that there should be proper time taken to consider the impacts and alternatives.

You can read our full response below.

This is the Law Society's response to one of four consultation papers published by the SRA on 7 May 2014 on a wide-ranging programme of regulatory reform intended to remove unnecessary burdens on firms.

The other three consultations concern accountant's reports, the compensation fund and multi-disciplinary practices.