The Law Society has welcomed the decision of the Solicitors Regulation Authority to amend its proposals on reform of the solicitors’ professional indemnity insurance (PII) market.

Society chief executive Desmond Hudson (pictured) said today that the SRA’s decision to adopt Chancery Lane’s extended renewal period (ERP) is ‘demonstrative of an effective consultation process’.

Hudson also welcomed the SRA’s decision to keep financial institutions cover within the minimum terms and conditions of PII policies until 2014.

After receiving 300 responses to its consultation on PII market reform, the SRA has decided that:

  • In October 2011, the amount of time a firm can remain in the ARP will be reduced from 12 months to six months
  • From October 2012, the ARP will be funded jointly by qualifying insurers and the profession, with liability for claims arising from firms that have not taken out insurance moving from the ARP to the compensation fund
  • The ARP will be replaced in October 2013 with a system where insurers offer a three-month extended policy period to firms that cannot obtain professional indemnity insurance for the following year
  • The single renewal date will be maintained until October 2013 to facilitate the transition
  • Financial institutions will not be excluded from the minimum terms and conditions of insurance for the time being

SRA director of standards Richard Collins said: ‘The arrangements have been revised following extensive consideration of the consultation responses we received and the constructive discussions we had with stakeholders.

‘It was clear from these that the biggest challenge the SRA had to address was the ARP. This is a complex issue and it is impossible to satisfy all parties, however we believe that the arrangements now approved offer the best way of ensuring client protection through a competitive insurance market.’

SRA chief executive Antony Townsend said: ‘The changes we have made to our original proposals demonstrate our willingness to engage with the profession and other stakeholders in developing arrangements that offer the best way to ensure that client finances are protected.

‘We have carefully considered the concerns raised by equality groups about the potential impact of these changes.

'We have been especially conscious of the impact, not only upon firms in the ARP, but also small firms that are particularly vulnerable to increases in insurance premiums. We will continue to work with equality groups to address these concerns.’

Hudson said: ‘The Law Society notes the recent decision of the SRA board in regard to the review of client financial protection, subsequent to a consultation process, marked by a constructive and transparent process of stakeholder engagement.

‘We welcome the SRA’s decision to maintain financial institution cover within the minimum terms and conditions until at least 2014 as a sensible position, both in the context of the other changes proposed and in view of the consequential harm, in particular, to conveyancing practitioners and their clients of such a change.

‘We also welcome the SRA’s recognition and adoption of the Law Society’s extended renewal period proposals as the optimal route for reform of [the] assigned risks pool for 2013 as demonstrative of an effective consultation process.

‘In regard to the proposals for meeting ARP liability in the 2012 indemnity year, the Law Society understands the rationale for SRA’s proposed approach and, subject to the views of council, which will consider this important issue at its next meeting, will continue to engage with SRA on options for ARP reform both generally and specifically during the 2012 transitional year.’

The Association of British Insurers (ABI) reacted angrily to the news.

Director of general insurance and health Nick Starling said: ‘These disappointing proposals are a missed opportunity for the long overdue reform which is so badly needed.

‘Insurers warned the SRA that a failure to make radical change would not only damage the interests of solicitors, but also reduce consumer choice.

'Persisting with the current situation will make insurance ever harder to find for those smaller firms who most need a policy to cover what they do, not what they don’t.

‘The proposal to close the ARP from October 2013 is much too late, and little else has been put forward.

‘It is hugely disappointing that they have behaved so timidly considering the advice they received from their advisors, Charles River Associates, last autumn - that immediate and far-reaching change was needed.

'They have failed to heed the warning.

‘The regulator has failed in the past to control both entry to the profession and the behaviour of many of those in it.

'Insurers have done their best to deliver competitively-priced insurance, but with stricter capital requirements approaching, we needed more from this review.’