Falling through the net

Payments are made from the compensation fund where a solicitor has stolen or not accounted for client money. For solicitors to pay in to the fund is a hallmark of their professionalism. A badge of honour.

So far, so uncontroversial. Or so one might have thought. The Axiom Ince debacle, which could cost every practising solicitor dear, has prompted a tortuous debate about the viability of the fund of last resort.

A review was inevitable once the extent of the carnage became evident. The SRA has already received over £33m in claims, with more to come. That could be enough to wipe out the fund’s reserves, which currently stand at £30m (though it remains to be seen how much can be reclaimed from insurance or frozen assets).

An interim cash call has been ruled out, but a large increase in the annual levy appears inevitable.

Remember, too, that claims against the fund were rising anyway, with interventions increasing in number and becoming more complex. And exhausted reserves will need to be replenished.

For the moment, the regulator must also contend with the Legal Services Board’s review of its own conduct in relation to Axiom Ince.

With England and Wales among the world’s most liberal markets for legal services, some are asking whether the compensation fund has become an anachronism. There does not seem to be any equivalent. The banks with whom solicitors place money protect only £85,000 under the Financial Services Compensation Scheme. Chartered accountants have a compensation fund of sorts – but for victims of dodgy investment advice. Not the same.

‘The compensation fund belongs to the pre-Clementi era of partners and sole practitioners being liable “to their last cufflinks” for any debts or defaults,’ opines one Gazette reader. ‘I would not agree to be an unlimited insurer for the likes of Axiom Ince.’

Whether or not you agree, identifying the problem is easier than coming up with reputationally palatable reforms. Changing the rules on holding client money will be considered, the SRA says.

The claims cap could be lowered and more comprehensively applied. But if wronged clients can only be reimbursed a fraction of their losses, that raises another awkward question. What’s the point of a safety net that many of them will fall through?