Solicitors Indemnity Fund (SIF): background and consultation
On 23 November 2021, the Solicitors Regulation Authority (SRA) launched a consultation on the future of the Solicitors Indemnity Fund (SIF) and post six-year run-off cover (PSYROC).
This factsheet is to assist understanding:
- how we have arrived at the current situation
- the content of the consultation
- issues around the SRA’s proposals about SIF
We have not set out our proposed position here, but we'll circulate an outline argument in January, to aid local law societies in preparing submissions.
The prospective closure of SIF and the unavailability of alternative PSYROC options threaten an unacceptable transfer of risk from solicitors to clients.
This could seriously undermine public confidence in the solicitors' profession, which means that the outcome is of importance to all Law Society members.
The background has been explained succinctly in the SRA’s consultation document.
- The Law Society of England and Wales established the SIF in 1987 under section 37 of the Solicitors Act 1974, for the purpose of providing compulsory professional indemnity cover to all solicitor practices in England and Wales
- In September 2000, following a vote of Law Society members, the SIF was placed into run-off following the introduction of an open market insurance model, which required firms to hold professional indemnity insurance (PII) with an insurer operating in the open market. The minimum terms for that insurance have always included a requirement that if a firm ceases without a successor firm, the last recorded insurer for the firm must provide cover for negligence claims made within six years of the firm closing. This is known as 'run-off cover'
- The SIF is made up of funds formerly contributed by the profession. It is administered by a separate company, wholly owned by the Law Society, Solicitors Indemnity Fund Ltd (SIFL). The Law Society's indemnification arrangements (along with its other regulatory functions) were subsequently delegated to the SRA following the SRA’s establishment as the independent regulator for the profession in 2006. The operation of the SIF is currently governed by the SRA Indemnity Rules 2012
- Following being placed in run-off, the SIF has remained liable for:
- claims made during the period a firm was covered by the SIF (1 September 1987 to 31 August 2000)
- claims made after 31 August 2000 by law firms that ceased without a successor practice on or before 31 August 2000
- The above run-off cover is not time-limited and is not affected by this consultation. Irrespective of the outcome of the consultation, this cover will continue to be provided, whether by the SIF or by transferring the SIF’s outstanding liabilities to another party, such as a third-party insurer. This would be funded using the SIF’s residual funds
- SIF also provides run-off cover to firms that ceased on or after 1 September 2000 once their six-year run-off cover has expired. This is known as supplementary run-off cover or post six-year run-off cover (PSYROC). This arrangement was put in place by the Law Society to run from 1 September 2007 (the point until which firms would be covered by their own mandatory six-year run-off cover) to claims notified before 30 September 2017. The cost of this cover is met out of the SIF surplus
- The SRA has extended the provision of PSYROC on three occasions. The first time was in 2012 when it agreed a three-year extension to cover claims notified before 30 September 2020. A further one-year extension was agreed in June 2020 and again in June 2021, extending the provision of PSYROC through the SIF until 30 September 2022
The SRA’s consultation addresses the question of whether PSYROC should continue to be maintained through the SIF in terms of proportionality and ongoing costs.
It sets out the SRA’s decision-making framework, involving consideration of both its regulatory objectives and the principles governing regulatory activities.
It also includes the evidence and engagement that has informed the consultation process. Most notably, this includes a substantial analysis of claim patterns and the impacts on consumers and solicitors of terminating PSYROC, produced by Willis Towers Watson.
There are also details of engagement with a virtual reference group (on which the Law Society has been represented, as well as a number of members, insurers and consumer representatives).
In addition to considering the viability of continuing to provide PSYROC as a regulatory arrangement through SIF, the consultation document considers a range of alternative options, including:
- insurance through the open market – amending insurance rules to require participating insurers to provide PSYROC on top of the six-year run off cover that is currently provided for
- establishing a partner insurer to provide on-going PSYROC cover through a Master Policy
- consideration of alternative models of operating an indemnity fund for ongoing PSYROC on a more cost-effective model than SIF – working through a larger organisation who have the relevant staff expertise to undertake most of the claim assessment, claim handling and legal work in house, and which may therefore reduce the handling cost of each claim
- regulatory arrangements for more targeted on-going PSYROC cover, limiting eligibility as compared to the existing SIF arrangements. Under this option PSYROC provision could be open only to claims from particular practice areas or for firms of a particular size, where there is the highest density of claims
The consultation considers steps that might be taken in collaboration with the Law Society to partially mitigate the risks to clients when closed firms no longer have recourse to PSYROC.
These might comprise:
- advisory support to firms to help them understand their options when they close and how they can attract a successor practice; and
- providing information to clients at the time a firm closes, on the basis that the client might then be in a position to take pro-active steps, such as taking out insurance themselves
Finally, the consultation concludes that if SIF closes – and it's decided that there is no case for ongoing PSYROC as a regulatory arrangement – the SRA’s view is that under the SRA indemnity insurance rules any surplus funds available after winding up SIF should be returned to the Law Society to be applied for the overall benefit of the profession.
This recognises that there would be a need for further discussion, and indeed consultation, on the options available.
Nothing is said about timelines.
The SRA’s position and evidence
The SRA’s consultation analysis examines the “regulatory rationale for ongoing provision of PSYROC” with reference to some but not all of the regulatory objectives set out in section 1(1) of the Legal Services Act 2007, and having regard to the “professional principles” set out in section 1(3) that regulatory activities should be transparent, accountable, proportionate, consistent and targeted.
The SRA believes that regulatory arrangements for ongoing PSYROC are unlikely to be proportionate in terms of consumer protection. It therefore concludes that SIF should close and that none of the alternative options explored are viable either.
The SRA focuses primarily on the consideration of ‘proportionality’, suggesting that:
- the cost of maintaining regulatory arrangements for PSYROC is not proportionate to the level of consumer protection provided
- the absence of on-going PSYROC will not have a significant impact on the availability of legal services; and
- removing regulatory arrangements for ongoing PSYROC would be consistent with other regulators of legal services
Drawing on the analysis provided by Willis Towers Watson, the SRA explains that:
- SIF cannot continue without the injection of new funds
- if a system of ongoing PSYROC were to be maintained, then a mandatory levy on the profession would be the best way for such further funding to be raised; and
- the annual cost of such a levy would be around £16 each year for every practising certificate holding solicitor or alternatively £240 per firm per annum
However, the SRA rejects this possible solution on the basis that:
- a levy set on a flat, universal basis would involve cross-subsidisation between firms which it considers would be disproportionate, anti-competitive and not targeted; and
- a levy or premium on a risk basis would be more complex to administer and could see a significant cost burden for small firms working in certain practice areas, or those reaching retirement
The SRA also states that the cost of a levy would “likely” be passed on to consumers by at least some regulated providers. There is no supporting evidence for this suggestion.
The SRA points to the unavoidable expense of SIF as a consequence of the inherently high costs of handling long-tail claims, where ongoing management and insurance costs are likely to amount to around £1.5 million per year, and an average administration cost of £48,400 per successful claim.
Around half of claims do not result in a payment.
In looking to “balance the regulatory objectives” the SRA on the other side of the proportionality equation draws attention to the small number of consumers that would likely benefit each year from the ongoing provision of PSYROC.
The evidence suggests an average of 31 claims per year are paid from SIF, which the SRA characterise as “low value”.
The average amount paid per claim, including defence costs, is £34,600.
The SRA concludes that removing regulatory arrangements for ongoing PSYROC would be consistent with other regulators of legal services – arguing that clear decisions now will bring an end to uncertainty and provide a transparent way forward.
Our starting point
We believe that any solution to the provision of PRYSOC should be based on the following objectives:
- protecting consumers by maintaining existing long-term cover
- maintaining public confidence in legal services provided by solicitors and accordingly enabling the entry of new firms into the market
- protecting the reputation of the profession
- enabling all solicitors to change their career path without creating new risks for former clients
- making solicitor retirement costs predictable and affordable, also for the employees of closed firms
- allowing the orderly cessation of member practices
Furthermore, if practical, the following considerations should also be taken into account:
- providing an equitable distribution of costs between members; and
- ensuring manageable and sustainable costs for the profession
In October 2021, the Law Society’s Council agreed the following statement:
“1. The Law Society accepts that a decision relating to the continuation of the Solicitors Indemnity Fund (SIF) is a regulatory matter to be determined by the Solicitors Regulation Authority (SRA).
“2. The Law Society remains committed to continue to work with the SRA to facilitate the extension of SIF.
“3. The Law Society believes that:
“a) it is in the interests of the profession and in the wider public interest that comprehensive and affordable professional indemnity insurance continues for the protection of solicitors and their clients, at the end of the mandatory six-year run-off period;
“b) following its own research over many years and on current evidence, the best way of achieving this is to maintain a mutual fund such as SIF, with such adjustments as would aid its longevity and affordability;
“c) retaining SIF would meet regulatory objectives, to maintain access to justice and the rule of law; to protect the interests of consumers and encourage an independent strong diverse and effective legal profession;
“d) a speedy resolution is required, in the interests of market and public confidence, and for the stability and the future management of SIF funds.”
In developing our response to the consultation, we will focus on consumer interest in the continued provision of PSYROC as a regulatory arrangement. This is in light of the fact that:
- the absence of PSYROC would result in significant consumer detriment – no evidence has been provided to suggest otherwise
- there is no evidence that the continued provision of PSYROC would negatively impact on consumers, increase the cost of services for consumers, or undermine public confidence in legal services
- it is the Limitation Act that creates long-term liabilities for solicitors, who could face claims from former clients (or their beneficiaries) in relation to the past provision of legal services
- client protections are (consciously or otherwise) one of the factors influencing consumers when deciding whether to engage the services of a solicitor
The SRA suggests that any residual funds from SIF could be returned to the Law Society.
Under the SRA Indemnity Rules, if the fund is closed and the SRA determines that the surplus will not be used for alternative indemnification purposes, then the surplus will be given to the Law Society to be used for the overall benefit of the profession.
However, the Legal Services Act requires that the exercise of the Law Society’s representative functions must be separate and independent from the exercise of the SRA's regulatory functions, which include indemnification arrangements.
This separation is also required under rules made by the Legal Services Board.
Therefore, establishing or administering an indemnity fund (through SIF or an alternative scheme) and the levying of contributions to the fund would amount to carrying out a regulatory function.
Any policy position taken by the SRA in relation to continuing or ending PSYROC arrangements does not alter this statutory framework.
If the SRA decides that it will make no further regulatory arrangements in respect to PSYROC, it does not mean that the Law Society can step in to take its place.
We'll continue to engage with the wider profession to develop our response, making sure:
- you have had good opportunity to contribute, and
- the final document is a proper reflection of your views
We've already conducted a series of meetings and discussions to engage with different segments of the membership, and former members.
Any members who wish to feed into our consultation response are welcome to email their thoughts to SIF@lawsociety.org.uk.
We're particularly interested in any examples that members may be able to provide of long-tail claims, that arise more than six years after a firm has closed.
Some anonymised, real-life examples would be helpful to illustrate the kinds of consumer losses that might go uncompensated in the absence of SIF.
Responding to the consultation
We strongly encourage members (both individually, and as firms or local law societies) to respond to the consultation.
In mid-January 2022, we plan to share an overview of our response to help facilitate this.
Responses to the consultation must be submitted by Tuesday 15 February 2022.