Much of the Solicitors Regulation Authority board’s time during 2010 has been devoted to ensuring that the professional indemnity insurance (PII) regime is fair and fit for purpose, particularly when trading conditions are difficult. Good progress has been made in containing the financial burden of the assigned risks pool upon the wider profession. We have toughened up the requirement that ARP firms pay their premiums, closely monitored their risk management and encouraged orderly close-down. Today, the ARP is smaller and better managed than it was a year ago.

But we have been looking too at the longer term, making sure that our client protection regime is fit for our new outcomes-focused approach to regulation and the arrival of alternative business structures. Therefore, we commissioned Charles River Associates to carry out an independent, thorough review of the financial protection regime. They reported in October, and we published the report. Having considered their recommendations, we are now consulting on changes which would take effect in October 2011, and others, which require additional research and consultation, to follow in 2012, or beyond.

The underlying objectives behind our proposals are to ensure a fair, transparent and affordable set of arrangements which give adequate protection for clients and help improve risk management.

It may be helpful if I explain first what we are not proposing to change. All the evidence shows that the open-market model of PII insurance has substantially reduced the cost of financial protection. We have concluded that there is no case for moving back to the Solicitors Indemnity Fund model, or to the earlier Master Policy. The SRA is proposing the following changes from October 2011: For 2012 or beyond, the SRA is seeking views on:

  • Whether to reduce further the scope of the MTC, to protect only those clients who are not able to protect themselves. Clearly, individuals need proper regulatory protection. However, larger corporate clients have in-house legal departments that are knowledgeable about the law firms serving their sector. These clients do not need regulatory protection.
  • Changing the way in which the ARP is funded. At present, all qualifying insurers are liable to meet the liabilities of the ARP (and insurers generally cover their potential liability by increasing premiums for all insured firms). We are seeking views on different potential funding arrangements for the ARP, including a direct levy on the profession, or a levy based on a percentage of PII premiums paid by firms.
  • Ending the ARP’s role as a provider of policies of qualifying insurance altogether, which would mean that firms that were unable to obtain open-market insurance would not be able to continue in practice.
This summary gives only the headlines – detailed explanations are provided in the consultation. Both the Charles River Associates report and the SRA consultation are available at the SRA website.

  • To remove the single renewal date. This is an accident of history, stemming from the days of the Master Policy and SIF. Provided firms ensure that they always having qualifying insurance in place, they will be able to renew whenever they wish. The single date causes problems for both insurers and the insured. It can mean that firms have little time in which to consider quotes. It can cause firms, particularly smaller ones, to fall at least temporarily into the ARP. Removal of the single renewal date should make it easier for new firms to obtain insurance at any time.
  • To remove insurance for claims by financial institutions from the compulsory Minimum Terms and Conditions (MTC), though claims arising from acts, errors, or omissions occurring before October 2011 will still be covered. Firms will, of course, still be free to acquire cover for claims by financial institutions, but it will no longer be mandatory. Insurance policies provided by the ARP will be based on the compulsory MTC, so in future will not provide cover for claims by financial institutions. The fundamental assumption underpinning this proposal is that PII should be targeted to protect clients who need it, and not embrace those who are sufficiently informed to act in their own interests. This should reduce premiums for firms not acting for financial institutions, thus targeting the costs more closely on the risks, and improving incentives for good risk management.
  • To reduce further the maximum period a firm can be covered by the ARP, from 12 to six months.
  • To require firms entering the ARP to create and implement a robust and credible plan, to be reviewed by the SRA, which will either address the underlying reasons why cover was not obtained on the open market, so that open-market cover can then be obtained, or will enable the firm to close in an orderly fashion within the six-month period.
    • The changes proposed for 2011 should not be seen in isolation, but as a step towards a regime that is fair, transparent, cost-effective and targeted, and which encourages a healthy and strong profession.

I urge all those with an interest in this subject to let us know their views.

Charles Plant is chair of the board of the Solicitors Regulation Authority