The legal consumer watchdog has delivered a damning assessment of the regulator's plan to reduce the burden on the compensation fund by cutting large payments.

Sarah Chambers, chair of the Legal Services Consumer Panel, said wronged clients were being asked to give up significant protections without any benefits, decrying the proposals as ‘poorly designed’.

The Solicitors Regulation Authority wants to address the soaring cost of the fund by reducing the maximum payout from £2m to £500,000 and by prioritising payments based on the ‘impact of loss’. The fund would be unlikely to pay out when clients have been able to claim already on a firm’s insurance policy.

In the panel’s response to the proposals, Chambers said it was ‘perverse’ to want change based on the high cost of claims from fraudulent and reckless investment schemes. She said the SRA should tackle scams or misconduct through enforcement, not by cutting off compensation for wrongdoing.

‘It is an abdication of [the SRA’s] responsibility to attempt to reduce compensation payment to consumers who have suffered financial loss as a result of misconduct or dishonesty,’ she said. ‘And it would be a double injustice to be penalised by the very regulator who failed to prevent the wrongdoing.’

Chambers said the SRA had drawn up its proposals without consumer research or supporting evidence. The regulator provided no analysis why half of claims to the fund are declined, nor what the impact on victims of dishonest solicitors would be.

The response outlines the danger in eroding public confidence by taking away a safety net. It stresses that the fund is a benefit rather than a burden to the profession, as it adds a layer of trust.

‘If the cost of contributing to the compensation fund is driven up by solicitors partaking in reckless activities, the SRA needs to focus on tackling these activities,’ added Chambers. ‘Adjustments to how the compensation fund operates cannot be to the detriment of those consumers who have been wronged.’

The panel expressly opposed the proposal to end compensation to third-party complainants who had suffered financial loss. This was described as ‘grossly unfair, inconsistent and contrary to the SRA’s regulatory objective’.

The SRA has said it wants to ‘strike the right balance’ between protecting clients and making sure the fund remains sustainable.

The solicitors profession paid £25.6m into the fund in 2018/19, with firms contributing £1,680 and individuals £90. In 2010/11 the sums were £120 for firms and £10 for individuals, adding up to £2.1m.