It is little surprise that our recent announcement about the overhaul of client financial protection arrangements has attracted much interest and debate in the media and among clients, practitioners and insurers.

Last month, following extensive engagement and consultation, we announced a staged approach to changing the arrangements for client financial protection which will place them on a sustainable footing for the long term.

These arrangements will deliver greater competition and choice within the market, should reduce the overall cost of professional indemnity insurance (PII) and maintain the very high level of client protection we require in the public interest.

The operation of the assigned risks pool (ARP) is at the centre of the changes – a mechanism that, for years, has operated to the satisfaction of few.

The main changes are:

  • In October 2011, the amount of time a firm can stay in the ARP will be further reduced from 12 to six months;
  • For the indemnity year from October 2012 to October 2013, the ARP will be funded jointly by qualifying insurers and the profession, with liability from claims arising from firms that have not taken out insurance moving from the ARP to the Compensation Fund; and
  • In October 2013, the ARP will be abolished and replaced with a system where insurers offer a three-month extended policy period to firms that cannot obtain PII for the following year. The single renewal date will be maintained until October 2013 to facilitate the transition but will then be removed.

We are delighted that the profession has largely welcomed these reforms.

We do however understand there have been concerns, predominantly from insurers about not replacing the ARP before 2013, while some groups representing black and minority ethnic (BME) practitioners have highlighted concerns about the effect of the abolition of the ARP on BME firms, which are disproportionately represented in the ARP.

However, one thing is certain: there is agreement across the board that the status quo cannot continue. The current arrangements for PII are at risk of collapse if we carry on as we are.

The number of firms in the ARP has risen from 26 in 2007/08 to 298 in 2010/11.

Ten years ago the annual cost of claims on the ARP – ultimately borne by the profession – was £9m. This has risen to about £50m today.

The PII market works well overall, providing a high degree of protection to the public and the profession. It is the ARP that is putting the system under strain.

It is causing insurers to exit the market, providing a barrier to the entry of new insurers and causing existing insurers to constrain their market share rather than competing hard for new business.

Most of the firms in the ARP are small – up to three partners – yet it is these firms whose choice in the current market is most constrained as a result of the impact of the ARP on insurers.

The majority of these firms, which make up 80% of the legal services market, have a very limited choice of insurers. This significantly reduces competition, inflates premiums and distorts the market.

In addition, the majority of firms that can get insurance are penalised with around 15-20% loaded to their premiums to pay for the ARP.

We believe that the open market system is best for clients and everyone in the profession. By replacing the ARP, new companies will be attracted into the market, offering greater choice and competition.

We have carefully considered the concerns raised by BME representative groups, who worry that some of their members may not be able to get insurance under the new system and will no longer have the option of the ARP.

I do, however, believe that by encouraging new players to enter the market, many firms who might fall into the ARP will be in a far stronger position to gain cover.

It is also important to remember that the vast majority of BME firms are not in the ARP and these changes will bring significant benefits to them from a greater choice of insurance provider.

We will however continue to work closely with insurers and BME representative groups to address their concerns and ensure there is fair treatment for all members of the profession.

We have also been asked why we are waiting until 2013 to replace the ARP. Our indemnity rules and agreements with qualifying insurers need to be reworked to make arrangements for the three-month policy extension period firms will have under the new arrangements to secure renewal or close down.

These arrangements have to be in place for a full year before the ARP is abolished. There is insufficient time to discuss and settle these arrangements in time for introduction in October 2011.

In addition, it is important that these changes are delivered through a staged and well-planned transition which gives time for the profession and insurers to prepare for the changes.

Our original financial protection proposals have been revised extensively following detailed discussions with firms, representative groups and insurers, and I would like to thank everyone who responded to the consultation.

We always knew it would be impossible to satisfy everyone, but I believe the new arrangement offers the best way of ensuring client protection through a competitive insurance market.

Full details of the changes can be found at the SRA financial protection policy statement page.

As a regulator we also need to address the causes of rising insurance claims.

Clients are best served by ensuring that the causes of a claim do not occur in the first place, rather than by protecting them when they do.

For instance, there has been a substantial increase in insurance claims in the past few years as a result of poor quality and dishonesty in conveyancing transactions.

Last month we published a draft supervision and enforcement strategy setting out how we intend to engage with firms undertaking conveyancing work from October to reverse this trend.

The strategy can be found at the SRA conveyancing page.

During 2011 we will be conducting a fundamental review of our approach to the regulation of conveyancing and the holding of client money.

We believe this two-pronged approach will help safeguard the future of the PII arrangements by creating a vibrant and competitive market – helping firms and the profession to plan for the future with greater confidence.

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