Following an initial 12-month extension to the Solicitors Indemnity Fund (SIF), the Solicitors Regulation Authority (SRA) set out its intention to close the fund and remove any regulatory requirement for existing and retired solicitors to maintain post six-year run-off cover (PSYROC).
Background
When the Professional Indemnity insurance requirements of practicing law firms in England and Wales moved from a mutual to the open market, the SRA's Minimum Terms and Conditions (MTC) required participating insurers to provide six-year run off cover should a firm close within the policy period without a successor.
The final layer of protection was a fund emanating from the surplus funds of the closed mutual SIF. The benefit of SIF has always been in protecting both the profession and the consumer for any claims arising after the initial six-year period following closure, particularly relevant for areas of practice such as conveyancing, wills, and probate where losses may not be discovered until significant time has passed. Some statistics shared by the SRA in February suggest that 11% of post-closure claims arise more than six years after a firm has ceased to trade (and mandatory run-off cover has expired). PSYROC has therefore been vital for consumers with long-tail claims.
Lockton Solicitors' View
Having considered the consultation, it was the immediate view of our team that we support the continuation of SIF to protect the good reputation of the profession and practitioners, whilst ensuring the consumer is also adequately protected. We feel that it is imperative practitioners have the appropriate risk transfer mechanism in place once retired or in the planning stages of doing so.
As highlighted in the overview, claims do still occur during the post six-year run-off period, citing paragraphs 32 and 33 of the SRA consultation:
“The corresponding estimated costs of notifications in 2023 are £1.7m which reduced to around £1.1m by 2029...
…Looking over a 20-year period from 2023 the average claim cost is forecast to be £49,700 and looking over a 30 year period from 2023, £66,900. This also means that the overall level of exposure increases over time.”
We feel it important to not only share our view as a stakeholder to the profession, but to also canvas the views of our circa 1,600 valued clients and the wider legal community. We undertook a survey questioning whether individual firms were in favour of a contribution by way of a small annual levy applied (£240 per firm of £75 per solicitor), receiving an overwhelming response in favour of this approach.
The question asked was as follows: Would you be happy if there was an additional charge to gain an extended level of security?
- 92.7% of clients responded in favour
- 94% of prospective clients responded in favour
We believe the SRA's regulatory objectives and the regulatory principles would be better served through a continuation of the SIF, funded through an annual levy on law firms.
Regulatory objectives aside, most importantly the annual levy ensures protection for all stakeholders in the long term. The question of how much the levy must be should be given much thought, ensuring a fair and equitable solution is found for the entirety of the profession.