The authority will be maintaining the existing ‘one-size-fits-all’ model
The Solicitors Regulation Authority (SRA) has decided not to action proposed changes to law firms’ minimum levels of professional indemnity insurance as consultation feedback revealed ’complexity’ concerns.
In March 2018, the SRA launched a consultation that proposed amending the existing ‘one-size-fits-all’ approach to minimum professional indemnity cover for lawyers – the consultation aimed to introduce measures that would enable lawyers to select cover that better reflected the work that they did, while still ensuring appropriate protection for the public.
These recommendations sought to reduce costs, in particular for smaller firms where professional indemnity insurance is a large overhead, create lower prices for customers and attract new legal businesses into the market.
The consultation listed a range of suggestions, such as reducing the minimum level of cover for firms from £2m, or £3m for incorporated firms, down to £500,000. Firms carrying out conveyancing work, however, would be required to have minimum insurance of £1m, to reflect the greater risks involved.
The SRA further proposed that terms and conditions should include greater flexibility around defence costs and capping the level of cover needed for the six-year run-off period after a firm closed.
The SRA’s consultation received a total of 160 responses – these were not enthusiastic about the suggested measures.
The industry feedback indicated that insurers may not lower premiums or firms may not take the opportunity to lower their cover, defeating the object of the recommendations.
Furthermore, respondents were concerned that if the changes resulted in firms buying additional layers of insurance, this could increase both cost and complexity. Some additionally thought that even if the measures managed to reduce costs, consumer protection could be detrimentally affected.
Based on the consultation feedback, the SRA has decided not to implement the proposed measures. It did not believe that firms or insurers would respond to the initiatives if they were introduced.
Paul Philip, chief executive at the SRA, said: “Indemnity insurance is a very significant cost for the sector, so it’s important that we periodically review arrangements, but this is a complex area with no easy answers.
“We need to make sure we are getting the balance right, so that the public is appropriately protected, while not burdening firms, and therefore their clients, with unnecessary costs. Careful, open and extensive consultation was essential.
“The feedback and market insight we received was invaluable, making it clear that the changes we were proposing were unlikely to deliver benefits for the firms and clients in the foreseeable future. We would like to thank everyone who responded and helped inform our thinking.”
Other key areas
The consultation in March additionally looked at potential changes to the SRA’s compensation fund – this forms part of the overall package for protecting the financial interests of clients. The SRA will use the consultation responses to amend its proposals in this area, confirming new steps for action in the new year.
Other key focuses the SRA will work on, building on consultation feedback, includes investigating how to make it easier for firms to close and reviewing the SRA successor practice definition; exploring the scope and product development around cybercrime cover; and reviewing participators insurers agreement, with a view to introducing an improved agreement for the 2020/21 indemnity year.
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