At a time of non-regulated competition, client protections must be maintained

LawNet CEO Chris Marston examines the issues around client protections.

In other blogs on this site, Helen Hamilton-Shaw has commented on the way LawNet firms are adjusting to changing client expectations, measuring client experience and taking steps to improve the customer journey at every step. LawNet firms want their clients to be satisfied with the service they receive and inspired to recommend them to others.

But underneath all this very important activity, there is a more basic need, to protect clients against the consequences of mistakes that might be made in handling a legal matter.

Every solicitors’ firm in England & Wales must arrange professional indemnity insurance (PII) of at least £2m (per claim) and this rises to £3m for firms which are incorporated as Limited Liability Partnerships or Limited Companies.

It’s an established principle of insurance that a person cannot insure against his or her own dishonesty or fraudulent behaviour, so to make sure that clients remain protected even in the extremely rare instances of a solicitor behaving dishonestly of fraudulently, the SRA maintains a Compensation Fund which will deal with cases where insurance is unavailable.

So, as things stand, solicitors have a very positive story to tell about client protection – much better for clients than dealing with unregulated providers of legal services.

However, that may be about to change. The SRA earlier this year published a Consultation outlining its proposals to reform PII and the Compensation Fund, and we at LawNet have strong views on many of those proposals. We have submitted our response to the SRA’s Consultation and this will be published in due course. This blog highlights our main concerns regarding these proposals and the negative impacts we see for clients and for trust in the solicitors’ profession.

Let’s start with what the SRA is proposing: -

On Professional Indemnity Insurance

• Reducing the minimum claims limit from £2m (£3m for incorporated entities) to £500,000
• Having a higher minimum limit for conveyancing - £1m, but after having first removed conveyancing from the basic minimum cover
• Flexibility around who the cover should protect – this means removing protection entirely for some client types, such as financial institutions and SMEs
• Changes to run-off, effectively capping the cover available, meaning that some clients might claim ‘too late’ when the cap has been reached

On the Compensation Fund

• Greater focus on hardship, narrowing eligibility by removing protection for some client types
• Reducing the maximum payment – from £2m to £500,000
• More robust assessment of claims

And it’s useful to remind ourselves of what the SRA’s Regulatory Objectives (ROs) under the Legal Services Act 2007 are: -

• RO1 protecting and promoting the public interest
• RO2 supporting the constitutional principle of the rule of law
• RO3 improving access to justice
• RO4 protecting and promoting the interests of consumers
• RO5 promoting competition in the provision of services
• RO6 encouraging an independent, strong, diverse and effective legal profession
• RO7 increasing public understanding of the citizen's legal rights and duties
• RO8 promoting and maintaining adherence to the professional principles

Here’s a summary of our response to the Consultation:-

LawNet Response Summary

LawNet firms are enlightened legal services businesses who are not interested in preserving archaic practices or in protectionism.

Our members’ commitment to client satisfaction is matched only by their commitment to high levels of client protection. They submit to external assessment of their management systems and processes through our ISO9001 Quality Standard but recognise that mistakes can be made and that clients must be properly protected from the consequences of those mistakes. Their membership of LawNet means that they must carry a minimum of £10m per claim PII cover, and many top up considerably above that level, deciding on protection that is appropriate for the work types they undertake, the clients they serve and the risks that exist in relation to aggregation, defence costs and other issues.

This sensible approach to risk management, the efforts made towards minimisation of errors and superior client protection arrangements do not however insulate our members from the consequences of the proposals you make in this consultation.

We do not agree that these proposals are likely to achieve the outcomes that the SRA seeks, and we believe that the most likely effect of these would be a significant transfer of risk from law firms and their insurers to clients, for no demonstrable or worthwhile gain, in terms of access to legal services or their price.

We do not find the data at all convincing, as it excludes insurers who have exited the market, does not consider maturing claims and is dated. We see no new compelling reasons for change since the SRA’s last consultation on this issue which the Legal Services Board rejected in 2014. We note also that the Legal Services Consumer Panel expressed its opposition on that occasion and we expect them to do so again in the absence of fresh and compelling arguments.

We have been able to read some responses submitted to the SRA by others and would like to express our particular support for comments made by: -

The Law Society of England & Wales

• These proposals are likely to undermine Regulatory Objectives 1,3 & 8;
• the evidence offered is unclear, insufficient and incomplete;
• more differentiated cover requirements would increase burdens for clients in terms of identifying a firm with appropriate protection;
• current MTCs are proportionate;
• competition is delivering value in PII provision;
• sole practitioners would be disadvantaged by these proposals from a bargaining perspective with insurers;
• premium cost savings are significantly over-estimated and even if achieved would be outweighed by increased top-up cover costs;
• savings for consumers would be negligible / nil & there would be no improvement in access to legal services flowing from this;
• the £500,000 minimum cover proposed is at odds with the claim that 98% of claims are settled for less than £580,000. Here it is important to note that this percentage assesses claims by number, rather than by value. See below for our further comments on this;
• these changes are unlikely to have any effect on the attractiveness of the sector to new entrants – CMA December 2016.

JLT Specialty Limited

• Notwithstanding the 98% figure quoted by the SRA regarding claims numbers, only 53% BY VALUE would have been met within £580,000;
• given its weaknesses, the data cannot be deemed to be comprehensive;
• it is proposed that the SRA would take a robust stance on ensuring firms buy the correct cover. This can only be after the event – too late for clients to receive adequate protection;
• little thought appears to have been given to aggregation;
• removal of financial institutions from cover would require firms which have previously acted for such clients to seek cover anyway;
• consumer choice for conveyancing services would reduce;
• if 98% by number of claims fall within £580,000, then it follows that 98% of the premium relates to the first £580,000 of cover. In other words, the cost of the remaining £2m/£3m is negligible;
• premiums are unlikely to fall as a result of excluding financial institutions from cover because claims arising from this client type are almost exclusively in conveyancing;
• transferring the risk to the client in exchange for an illusory promise of lower legal fees is not in the clients’ interests;
• the proposals would impact negatively on Regulatory Objectives 1,3,4,5,6 & 8.

Legal Risk LLP

• Sums in excess of £1m have been experienced in all types of claim listed in the SRA data;
• the proposed £2m turnover ceiling for SMEs to continue to be protected is too low, and there are problems in any event with any arbitrary turnover level, as clients’ circumstances change, and given the ‘claims made’ basis of PII cover;
• the range of possible PII protections available from clients would be confusing and irrational;
• a run-off cap would lead to a ‘race to judgment’ whether or not clients would be aware of it;
• the assumption by the SRA that top-up cover would be readily accessible is untested;
• the SRA’s objective of achieving lower premiums for firms doing low risk work is already achieved through current premium pricing;
• disputes between insurers, whether previous or current, or primary vs excess layer, are likely to increase, with detriment to client protection;
• the inevitable reluctance on the part of firms to rely on other firms’ undertakings would slow processes, add cost and damage trust between professionals.

LawNet sees no merit in the vast majority of these proposals which would reduce client protection and place a burden upon clients that is unreasonable and unrealistic in terms of most clients’ ability to make informed risk-based decisions in choosing a legal services provider. Most clients would simply not be in possession of enough relevant information to make such a choice and the status quo provides a more readily understood and reliable indication of the protections available to them.

We see only negative outcomes arising from most of the proposed exclusions from cover, each damaging to client choice, access and protections.

As far as the proposed changes to the Compensation Fund are concerned, the proposals to remove protection for charities, SMEs and individuals arbitrarily described as wealthy, and to reduce the maximum payment, are inequitable and will cause damage to the reputation of all solicitors. The SRA should focus on the root problem, i.e. solicitor malpractice, dishonesty and failure to insure adequately.

If you’d like to discuss our response in more detail, contact our chief executive Chris Marston at cmarston@lawnet.co.uk.