Protecting users of legal services – prioritising payments from the SRA compensation fund

In January 2020, the Solicitors' Regulation Authority (SRA) launched a consultation on reforming the Compensation Fund. It had previously consulted on changes to the Fund as part of a wider consultation on consumer protections (focusing mainly on professional indemnity insurance) back in 2018. This time around, many of the more damaging proposals from the 2018 consultation had been dropped, and it had taken onboard some of the suggestions that the Law Society made in response.

We are aware that the Compensation Fund is a burden, and agree with the SRA that steps should be taken to reduce costs, but we also believe that it provides a vital safety net to clients, and a guarantee that the profession will make good on the failings of its members, which remains central to public trust in solicitors.

The proposals

Some of the key proposals are as follows.

Eligibility to apply

Grant applications will be limited to the clients to whom the solicitors at fault provided their legal services.

Litigation costs and application fee support

Barring exceptional circumstances, grants would no longer be paid to applicants to cover litigation costs incurred to pursue alternative means of redress. Nor will they make payments to get professional assistance when applying for a grant from the Fund.

Circumstances where a solicitor has failed to have PII cover in place

Applications to the Fund relating to a firm having failed to get the required insurance, will be restricted to firms that were authorised by the SRA. They will also make clear that the Fund will not pay out where a firm’s PII provider becomes insolvent.

Maximum payments from the Fund

The maximum payment for a grant will be reduced from the current level of £2 million to £500,000.

Barristers and experts

The Fund will no longer cover the unpaid fees of barristers or expert witnesses.

Conduct and behaviour of the applicant

Clarify the current rules allowing for a grant to be reduced or refused on the grounds of an applicant’s actions, where they contributed to or failed to mitigate a loss, and introduce a requirement for full and frank disclosure.

Multiple application cap

There will be an upper limit of £5 million on multiple applications with a common cause.

Our view

We are keen to reduce the costs of the Compensation Fund, while ensuring that it is sustainable and provides protection to clients and their beneficiaries, who would otherwise go uncompensated. We opposed the move to limit eligibility to apply to the fund, because we believe that it could result in circumstances were innocent people with legitimate claims could be left without assistance, which would be damaging to them and the reputation of the profession.

We objected to the removal of litigation costs because that poses particular risk to impecunious and or otherwise vulnerable people. We saw no benefit in reducing the maximum payment for an individual claim from £2 million to £500,000, when the power to make grants is within the SRA’s discretion, and although we were not opposed to the introduction of a cap for multiple applications, we remain unconvinced that £5 million is the right level.

This last point was reflective of a lot of our concern about the proposals; that there was insufficient research to justify the reforms, or to demonstrate that they would reduce costs to ensure the Fund’s viability in the longer term. We called for more research to be conducted into the causes of claims, so that rather than reducing payments, the problem could be addressed by preventing claims in the first place.

What this means for solicitors

For individual solicitors the impact of the proposed reforms would likely be insignificant, although some of the changes could have serious implications for individual clients who could be left with no way to recover the full value of their losses. The reputation of the profession could also suffer if it appeared that we were cutting client protections.

Next steps

The consultation closed on 21 April 2020. We await the SRA’s response, and if it intends to press ahead with any reforms that are of great concern, we will engage with the Legal Services Board outlining our concerns.