The single renewal date for professional indemnity insurance (PII) should be scrapped from 1 October next year, the Solicitors Regulation Authority has recommended in a consultation on client financial protection, published today.
The regulator simultaneously announced that it will begin investigating failures in the conveyancing process early next year, and it is to exclude claims by mortgage lenders and other financial institutions from the minimum terms of cover. This means that firms involved in conveyancing will effectively need to buy extra cover.
Consultants Charles River Associates (CRA) recommended to the SRA that it should conduct an investigation into the conveyancing process in research commissioned to inform the regulator’s ‘root and branch’ client financial protection review, published at the start of November.
The SRA also suggests in its paper that the assigned risks pool (ARP) might be abolished in the future.
The regulator says that it intends to bring greater flexibility to firms and insurers when it comes to arranging PII cover.
SRA head of standards Richard Collins said: ‘If you have a more flexible insurance market, firms will be able to buy more appropriate cover.
‘There’s a huge amount of intervention by us as a regulator in the operation of the insurance market, but we should only be intervening where there has been a failure in the market.’
From 1 October 2011, the SRA proposes to: remove the single renewal date; reduce the time for which a firm is eligible to be in the ARP from 12 months to six months; remove the requirement for claims by financial institutions to be included in the minimum terms of insurers’ policies; and require insurers to tell the SRA about firms that fail to pay their premiums.
The SRA said that the single renewal date ‘arose as an accident of history’. CRA said in its report that ‘there is no market failure for which the appropriate regulatory solution is a single renewal date’.
The SRA paper says that, by removing financial institutions cover from the minimum terms, the majority of the 36% of firms that do not conduct residential conveyancing would benefit from lower premiums, while fewer firms would ‘dabble’ in conveyancing, and fewer would fall into the ARP.
The paper suggests that the Law Society and Council of Mortgage Lenders should consider creating a centralised database of firms that have insurance to undertake work for financial institutions. This, the paper suggests, may assist financial institutions in selecting firms for their panels.
The SRA said it had declined for the time being to follow CRA’s recommendation to introduce financial penalties against insurers that do not report firms that should have been reported.
From October 2012 and beyond, the SRA proposes to: exclude non-individual clients from insurers’ minimum terms; either scrap the ARP or restrict the work that ARP firms can do; fund the ARP through either a levy on the profession or a levy on insurance premiums; and consider whether insurers should be able to cancel policies for non-payment of premiums, or for fraud or misrepresentation in proposal forms.
The paper says that the ARP is ‘failing to facilitate the rehabilitation of firms’, and that, over the existence of the ARP from 2000/01-2008/09, only 61 firms have successfully returned to the open market after they have been in the pool.
‘We believe that it is not the role of the regulator to put in place (and effectively manage) insurance arrangements of last resort for firms unable to obtain open-market insurance,’ the report says. ‘No more is it the SRA’s responsibility, by analogy, to put in place arrangements to ensure business financing for firms unable to obtain appropriate business financing arrangements from the banks on normal commercial terms.
‘If the profession believed that it was in the interests of firms to have in place fall-back insurance arrangements, the Law Society or another representative body could put in place such arrangements. That is not, however, the role of the regulator.’
Alternatively, the SRA suggests, firms should be prevented from accepting new instructions and holding client money while in the ARP.
The Law Society said the SRA consultation has ‘some sensible proposals’, but removing work for financial institutions from the scope of the minimum terms and conditions of cover would ‘hit conveyancing solicitors hard’.
The Law Society said it was pleased that the SRA had heeded its call for an end to the single renewal date for PII, so that firms can renew cover at any time of year. It said a ‘significant number of solicitors’ had told the Society that the single renewal date placed additional pressure on insurers and brokers, which encouraged them to prioritise larger firms over smaller firms.
Chancery Lane said it also hoped the changes would mean more insurers would be encouraged to enter the PII market.
Law Society president Linda Lee said not requiring insurance coverage for commercial clients would be short-sighted. She said: ‘Conveyancing solicitors would find themselves forced to take out additional insurance – a bitter blow at this point in the economic cycle. The extra cost could be the last straw, which drives some solicitors out of business, thus reducing consumer choice.
‘The present arrangements provide comprehensive coverage for all solicitors' clients, without the need to make complex decisions about which commercial clients are too large to need protection and which are not.
‘However, we are pleased that the SRA has heeded our call to move away from the single renewal date. We are determined to ensure our members can take advantage of lower premiums, more choice in the market and a less pressurised renewal procedure that could result from this change.'