The Solicitors Regulation Authority has bowed to a chorus of opposition by abandoning plans to scrap its ‘one-one-size-fits-all’ minimum level of professional indemnity insurance cover.
Announcing a response to a consultation on the proposals, the regulator conceded that the change was 'unlikely to deliver benefits for the firms and clients in the foreseeable future'.
In March last year the SRA proposed reducing the minimum level of cover for firms from £2m (£3m for incorporated firms) to £500,000. Firms carrying out conveyancing would have a required minimum cover of £1 million.
Other proposals for the terms and conditions included greater flexibility around defence costs and capping the level of cover needed for the six-year run-off period after a firm closed.
The consultation attracted 160 responses, the SRA said. 'Feedback indicated - among other issues - that insurers might not lower premiums, or firms might not take the opportunity to lower their cover. There was also concern that if changes resulted in firms buying additional layers of insurance to maintain current levels, costs and complexity could increase. Even if costs were lowered, some thought that overall consumer protection would be reduced.'
The response notes that the insurance market is currently hardening and contracting, which would add another layer or risk to any changes. Back in 2014 the SRA consulted on a plan to cut minimum cover to £500,000, but this was blocked by the Legal Services Board for lack of supporting evidence.
Today's market will nevertherless remain more diverse. A new breed of freelance solicitor sanctioned by rule changes brought into effect last month only needs to get ‘adequate and appropriate’ PII if they are offering reserved legal activities.
Paul Philip, SRA chief executive, said today: 'Indemnity insurance is a very significant cost for the sector, so it’s important that we periodically review arrangements, but this is a complex area with no easy answers.
'We need to make sure we are getting the balance right, so that the public is appropriately protected, while not burdening firms, and therefore their clients, with unnecessary costs. Careful, open and extensive consultation was essential.
'The feedback and market insight we received was invaluable, making it clear that the changes we were proposing were unlikely to deliver benefits for the firms and clients in the foreseeable future.'
The SRA also revealed that feedback from a consultation had 'altered its thinking' on potential changes to its Compensation Fund rules. It plans to amend its proposals and will confirm next steps in the new year.
The Law Society welcomed the announcement. 'The SRA is to be heartily commended for listening and taking account of the evidence presented to them and recognising that their proposed reforms would not deliver the hoped-for benefits,' Simon Davis, Law Society president, said.
Clients, employees and solicitors would have borne significantly higher risk under the proposals and there was no evidence that they would have cut insurance premiums, he said. 'Premiums already reflect levels of risk in the work a firm undertakes, so the idea that the current system is unfairly "one-size-fits-all" is without foundation, and cost is front-loaded into the first £500,000 of cover, so lowering minimum indemnity limits to anything less than that would not have led to savings.
'The proposed changes would have radically reduced financial protections for clients and solicitors and were without merit, so it is hugely reassuring that they have been abandoned.'