The Solicitors Regulation Authority is beset by a conflict of interest when it comes to the compensation fund and its investigatory and enforcement roles should be separated.

Personal injury solicitors step away from the keyboard. Put down your BlackBerry. Resist the temptation to take to Twitter. The compensation I refer to is the Compensation Fund and the reference to culture is about how that fund is run by the Solicitors Regulation Authority.

On 14 September 2016, an article appeared in the Law Society Gazette reporting that the SRA had revealed a drop in the value of payments made by the fund of £5.9m to £17.9m in the year ending 31 October 2015, compared with total grants of £23.8m in 2014. The article also went on to report that there had been a drop in the number of interventions in the same period and that the drop in the number of interventions was one of the factors contributing to the reduction in payments from the fund.

All well and good then. Great news. Fewer interventions; less money to find to compensate clients of dodgy solicitors. Fabulous! Well, it would be if we could be certain that that was actually the true picture.

One reason we cannot be certain that the SRA have given us the full picture when it comes to interventions might be the case of Mr Tickell. On 26 September 2016, the SRA published notification of the intervention at the firm of Rex Taylor & Meadows, the grounds for the intervention being that Mr Tickell had been struck off. None of that is particularly unusual until you note that Mr Tickell was struck off on 19 November 2012, so the intervention took place almost four years later. Although it may not appear so at first sight, intervention is not a punitive measure, it is designed to protect the interests of clients and the wider public interest. So who was protecting the interests of clients and the wider public interest between 19 November 2012 and 26 September 2016?

That there is a very direct link between interventions and claims on the fund is not disputed. My concern is that the figures quoted by the SRA cannot be relied upon as evidence that all is well with the fund and contributions will remain static. How many more belated interventions are there out there?

I currently act for a client in connection with her claim on the fund in relation to a loss in excess of £100,000 suffered as a result of a ‘transaction that was suspicious and had the hallmarks of dubious financial arrangements or investment schemes’. This allegation against Theresa Naana Quartey was found proved by the SDT along with other allegations relating to Ms Quartey and her partner Gbolahan Olukayode Christopher Esuruoso (SDT reference 11350-2015).

When the claim was notified to the fund, the SRA responded ‘unfortunately in this case we will be unable to assist you’. Having read the schedule of delegations, I noted that only an adjudicator could make a decision in relation to a claim in excess of £100,000 and therefore it appeared to me very odd that this letter was signed by a technical adviser, who is only authorised to deal with claims up to £10,000. I wrote and asked if the letter constituted a decision and the SRA said that the letter was an ‘initial assessment’. The letter does not state that this is just an initial assessment or that my client was still fully entitled to proceed with a fund claim. One can only speculate about the SRA’s response to any solicitor who may wish to use an ‘initial assessment’ letter as part of their complaints procedure!

In the letter confirming that no decision had been made, the SRA stated that it was still their view that any application would fail. This is very concerning because at that stage they had not investigated the claim –hey had not even written to the defaulting solicitors at that point.

Things then got worse when they did write to the defaulting practitioners. Unsurprisingly enough, the defaulting practitioners stated that there had been no fault on their part and that my client was not entitled to a claim from the fund. What was surprising was that the SRA appeared happy to accept the word of the defaulting solicitors.

By the time the application was made to the fund, the solicitors had closed their firm and despite repeated requests the SRA refused to confirm whether or not that closure had been an orderly wind-down with appropriate run-off cover put in place. Eighteen months later the findings of the Solicitors Disciplinary Tribunal revealed

· There had been no orderly wind-down of the firm

· No run-off cover was put in place

· As at 31 December 2013, the SRA’s investigation officer had identified a cash shortage in the sum of £116,994. That cash shortage has never been replaced. I have asked the SRA to confirm if their investigation officer recommended intervention but the SRA have refused to answer that question.

There was no intervention and the firm continued to trade until 30 September 2014. During that nine-month period between 31 December 2013 (the date of the shortage calculated by the investigation officer) and the closure of the firm, the SRA knew that there was a six-figure hole in client account and suspected one of the partners had ‘involved herself in a transaction which was suspicious and had the hallmarks of dubious financial arrangements or investment schemes’. The SRA knew this but nobody else did. How could that be protecting the interests of clients, the wider public or the profession which funds the SRA and the fund?

Of course nobody gets everything right all the time and it may well be that some might take the view that this is just ‘one of those cases’. Indeed it might be comforting to some (but not my client) to think that this is the case. However, I have recently spoken to Chris Bishop at Slater Heelis and he has encountered difficulties in dealing with the SRA Compensation Fund in relation to a matter where the defaulting practitioner has been convicted of money laundering and sentenced to prison. Chris told me: ‘In my case the technical advisers have taken two years and acted like commercial insurers defending - running every possible ground they could to reject. Time limits, denials of dishonesty, failure to pursue third parties.’ My own experience has been very similar and I do worry how many more cases like these might be out there?

Dealing with this claim has led me to not only question how the SRA deal with Compensation Fund claims but whether the fund should be in their hands at all.

There is a very serious question here as regards potential conflict of interest. The SRA is requiring the applicant to provide evidence in support of their claims but at the same time refusing to disclose to the applicant or adjudicators/adjudication panels evidence it has in its possession that may well support that applicant’s claim. More worrying is the fact that the SRA also have control of whether or not to intervene at a firm and whether or not to allege dishonesty in proceedings at SDT. It appears to me that the fact that a firm has been intervened in or dishonesty proved at SDT will make it more likely for an award to be made from the fund.

I cannot foresee how the SRA can continue to administer the fund and be responsible for investigations in relation to misconduct by solicitors without constantly being in a state of conflict.This conflict not only relates to the individual claims on the fund - the SRA have what appears to me to be an own interest conflict also. There is much talk coming from The Cube about the need to drive down the cost of regulation in order to drive down the cost of legal services (I am not at all convinced the equation is quite so simple but that is an entirely different article). So is there not a risk then when dealing with applications to the fund that the SRA is not considering each case on its merits but looking to supress the level of claims as much as possible in order to be able to deliver the good news that fund contributions will not increase? I am not suggesting for one moment that a ten-fold increase in contributions is a good thing but there is a world of difference between an appropriate contribution and an artificially suppressed contribution.

One answer to this problem would be for the fund to be administered by the Law Society rather than the SRA. No doubt the SRA will claim that in order to be an approved regulator, clients of regulated firms will need access to a fund. This is true but clients of firms regulated by the SRA can still have access to a fund even if that fund is administered by the Society. The Legal Services Act 2007 defines ‘compensation arrangements’ as arrangements ‘to provide for grants or other payments for the purposes of relieving or mitigating losses’ in relation to matters, including ‘negligence or fraud or other dishonesty’ and other matters. There does not appear to be any specific requirement for the approved regulator to administer that arrangement.

Given the SRA’s desire for independence I am surprised that we have not heard more about the future of the Compensation Fund. The fund was established long before the SRA was even a twinkle in Clementi’s eye; surely the SRA cannot think that if there were to come a time when it was no longer the regulatory arm of the Law Society it will simply inherit the fund. Is Chancery Lane going to just sit back and wave goodbye to all that cash?

This separation between investigation/enforcement and dealing with compensation awards is the only way that I can see to avoid the conflict of interest the SRA currently has.

The profession pays for the fund but seems to take very little interest in it. There is much we can learn from the fund, if only we had all the facts and figures; it is more than just a rogue’s gallery. The nature and value of the claims made on the fund, including those rejected at initial assessment, those formally rejected and those accepted, is in effect a barometer of the health of the profession.

In response to a Freedom of Information request in relation to Compensation Fund awards for 2014, 2015 and 2016 to date the SRA confirmed the following:

YearNumber of awardsValue of awardsLargest Single AwardSmallest Single Award

2014

861

£21,831,928.54

£1,763,180.05

£16.81

2015

626

£16,689,584.72

£1,597,079.50

£30.00

2016 YTD

473

£9,167,478.49

£509,017.84

£30.00

 It is noted that the figures in the table above differ from the figures quoted in the earlier Law Society Gazette article. The Minutes of the SRA Board meeting of 13 September 2016 state the figures of £17.9m in 2015 and £23.8m in 2014 includes the costs of intervention and storage of files. So it appears that intervention and storage costs were approximately £1.2m (6.7% of total payments) in 2015 and £2m (8.4% of total payments) in 2014.

Most interesting of all, the minutes also state that the balance of funds held had reduced from £56m to £44m and that this was consistent with a strategy to reduce the maximum amount held by the fund to £20-25m. A strategy that begs two rather interesting questions. How much does the static level of contributions owe to the efficiency of the SRA and how much does it owe to the fact that reserves are being deliberately depleted? The second question is how much would contributions have to rise, and how quickly, if there were to be another Wolstenholmes?

The 1,960 claims relate to 259 firms. Of those 259 firms, 199 were subject to intervention. The SRA will not provide the names of the firms that these claims relate to on the basis that this would be ‘commercially sensitive’ information, which is very strange given that of the 259 firms/practitioners in question 199 have been closed by the SRA and that closure was a matter of public record.

It is truly bizarre that the SRA will publish a rebuke for a minor regulatory breach but will not identify the firm/practitioner responsible for a £1,763,180.05 claim on the fund.

Anyone can reduce the compensation fund contributions to £3.50 if they just reject all claims and reduce reserves. It really isn’t rocket science. I just do not see how that can ever be in the interests of clients, the wider public or the profession.

Michelle Garlick is a partner at Weightmans

 

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