Compensation fund review recommends time limit extension

Changes to the solicitors compensation fund that may encourage more lenders to instruct sole practitioners were approved in principle by the Law Society Council last week.

A review of the fund - which compensates clients for the fraud and dishonesty of solicitors - recommended extending the time limit for applications from six months to 12.

Lenders say six months is too short, forcing them to issue 'protective claims' when they become aware of a solicitor's default.

Other changes include making lenders aware of the basis on which decisions to pay out are made, and bringing consistency to the discretion that allows the fund to deny a grant where an applicant has contributed to its loss.

The fund has often turned down lenders where it considers that they failed to take proper account of their interests.

The review said this provision, which is not applied against clear guidelines, might have been 'interpreted harshly against lenders'.

However, the review said it was difficult to gauge whether lenders would now alter their stance on sole practices, as there was 'no clear rationale' behind many of their policies to exclude solos from panels.

Many claims on the fund arise from sole practices, but the review pointed out that most defaults within partnerships will result in innocent partners claiming on their insurance.

The review also proposed two exclusions from the scope of the fund: unpaid counsel's fees and mortgage investment schemes operated by solicitors.

These schemes involve solicitors advertising attractive rates of interest to the public on the basis that they provide capital which the solicitor lends to commercial borrowers.

The sums involved can be very large; in one fraudulent case, it was 15 million.

The review also concluded that the 1 million limit for each and every claim should be retained, and that combining cover for dishonesty and negligence in an insurance-type arrangement would not be viable.

Following the council vote, work will begin on framing the changes.

Neil Rose