Closed consultations

SRA financial protection review

23 January 2012

The deadline for submission of responses to this consultation was 17 January 2012.

View our report on consultation responses and conclusions (PDF 12 pages, 122K)


Consultation on the implementation of the changes to indemnity insurance and compensation arrangements announced in April 2011

Purpose and scope of this consultation

  • 1.1

    This consultation paper represents the next stage of the SRA's financial protection review; the implementation in October 2012 of the changes to the arrangements for compulsory professional indemnity insurance (PII) announced in the SRA's Policy Statement in April 2011.

  • 1.2

    A copy of the April 2011 policy statement is attached at Annex A. That document sets out the steps leading up to its publication, including the independent review undertaken by Charles River Associates (CRA) and the SRA's comprehensive consultation paper issued in December 2010. The policy statement set out the SRA's conclusions following that public consultation.

  • 1.3

    For details of the SRA's policy, and the options on which consultation has already taken place and which formed the basis for the policy, reference should be made to these previous documents. The main changes for implementation are

    • the closing of the assigned risks pool (ARP) as a provider of policies of qualifying insurance from 30 September 2013 (with the exception of the continued provision of run-off cover incepted before that date);
    • the introduction, from October 2012, of a requirement that all policies of qualifying insurance make provision for extension by 90 days at the end of the insurance period if the insured firm has not taken out a new policy of qualifying insurance;
    • changes to the Authorisation Rules to control the work that may be undertaken by firms during that 90-day period;
    • provisions for the funding of the ARP in 2012/13 to be provided by both the regulated community and the qualifying insurers; and
    • provisions to remove the role of the ARP in 2012/13 for making payments in respect of uninsured firms and move this responsibility to the Compensation Fund.

Question 1. Do you have any comments on the SRA's decisions, set out in the policy statement, which form the basis for the changes which we are now consulting on?

Qualifying insurer's agreement (QIA) 2012 (including the SRA Indemnity Insurance Rules (SIIR) 2012)

  • 2.1

    The consultation draft of this document is attached at Annex B. Amendments to the QIA 2011 and SIIR to give effect to the changes set out in the Policy Statement are marked.

Extended policy period and cessation period

  • 2.2

    Commencing 1 October 2013, a firm's last insurer of record under the QIA 2012 will be liable for cover for the Extended Indemnity Period (30 days) and Cessation Period (60 days) if the firm does not renew its policy of qualifying insurance with its existing qualifying insurer and does not obtain a policy of qualifying insurance with another qualifying insurer. Amendments are made to implement the change as follows:

    • - SRA Indemnity Insurance Rules 2012: Rule 4.2, commentary following rule 4.4 and rule 5.3;
    • - Minimum Terms and Conditions (MTC): clauses 5.1 to 5.5 and clause 6.11; and
    • - the insertion of the new definitions of:
      • (a) "Cessation Period"; and
      • (b) "Extended Indemnity Period", in the QIA and in Appendix 4 ("Definitions") of the SRA Indemnity Insurance Rules 2012; and
      • (c) "Existing Instructions" in the SRA Indemnity Insurance Rules 2012.
  • 2.3

    If a firm which has entered into the Cessation Period is able to obtain a policy of qualifying insurance backdated to the commencement of the Cessation Period and providing cover for all instructions (whether existing instructions or new), it will not be in breach and will have no obligation to cease practice at the end of the Cessation Period. The previous qualifying insurer of record retains the liability for the Extended Indemnity Period to avoid issues of double insurance for that period and because it is expected that qualifying insurers will price in the risk or charge additional premium where an Extended Indemnity Period is triggered.

  • 2.4

    To assist the SRA in monitoring which firms have not obtained a policy of qualifying insurance, rule 17.3 of the SIIR 2012 requires a firm to notify the Law Society and the firm's insurer if it enters into the Extended Indemnity Period and, to make a further notification, if it enters into a Cessation Period;

  • 2.5

    No ARP Policy will provide extended cover for the Extended Indemnity Period or the Cessation Period.

  • 2.6

    With effect from 1 October 2012, six year run-off cover provided by the last qualifying insurer of record for policies of qualifying insurance expiring after 1 October 2012 shall commence from the end of the original policy i.e. 1 October 2013 irrespective of any Extended Indemnity Period or Cessation Period that is triggered.

Notice of intention not to renew cover

  • 2.7

    The MTC now make provision (paragraph 4.13) for an insurer to give at least one month's written notice of an intention not to offer the insured terms for the next indemnity period.

Solicitors' profession contribution to the ARP in respect of 2012 indemnity year liabilities

  • 2.8

    With effect from 1 October 2012, save for any legacy ARP firm with an unexpired eligibility for insurance by the ARP, the ARP will be restricted to providing cover for applied firms for a maximum of six months. Liability for the ARP's 2012 indemnity period (excess of premium collected) is to be shared between the solicitors' profession and the qualifying insurers which participate in the 2012 indemnity period in the layers set out below:

    • First £10 million of ARP liability in excess of premium collected - solicitors' profession
    • £10 million excess of £10 million - qualifying insurers
    • £10 million excess of £20 million - solicitors' profession
    • £10 million excess of £30 million - qualifying insurers
    • £10 million excess of £40 million - solicitors' profession
    • Excess of £50 million - qualifying insurers.
  • 2.9

    The proposed powers to levy the solicitors' profession and to contribute funds in the above layers are set out in new provisions added to the QIA Schedule 1 ("Assigned Risks Pool") at paragraph 1. The provisions for contribution are set out in paragraphs 1.2 to 1.4 of Schedule 1 ("The Assigned Risks Pool") to the QIA.

  • 2.10

    As announced in the April 2011 policy statement, it is the intention that the contribution to the ARP on behalf of the profession be made from any excess funds still held in the Solicitors Indemnity Fund (SIF) supplemented as necessary by a levy. Further information on the details of these arrangements will be announced in 2012.

ARP Policy cut-off and run-off cover

  • 2.11

    ARP policies are to be subject to a guillotine requiring that they expire on 30 September 2013 (consistent with the closure of the ARP at the end of the 2012 indemnity period). However, an ARP Policy that is in run-off under the terms of the ARP Policy clauses 5.1 and 5.2 as at 1 October 2013 and/or an ARP run-off policy as at 30 September 2013 will continue until their natural expiry at the end of their six-year term. The QIA is amended to incorporate the cut-off and disapply its application to those run-off policies. The changes made to address this are:

    • Schedule 1 (Assigned Risks Pool), paragraph 7;
    • MTC clauses 5.1 to 5.5;
    • SIIR Rule 6.2;
    • and SIIR Rule 12.6.

Compensation Fund for non-applied firms and scope of cover

  • 2.12

    Firms which fail to apply to the ARP when eligible or which are not eligible for cover by the ARP but nevertheless are in practice (non-applied firms), will cease to be covered by the ARP or side arrangement with effect on and from 1 October 2012. As a result the existing rule 14 has been deleted from the SRA Indemnity Insurance Rules. From that date, certain claims against such firms will fall to be assessed for cover on a discretionary basis by the SRA Compensation Fund, and this is addressed further below.

Question 2. Do you have any comments on changes proposed to the QIA and SIIR?

Authorisation Rules

  • 3.1

    The consultation draft of this document is attached at Annex C. Amendments to the Authorisation Rules, to give effect to the changes set out in the policy statement, are marked.

  • 3.2

    A new rule 8.11 introduces an obligation on firms entering the cessation period not to undertake legal activities save as required to discharge obligations within the scope of existing instructions or undertake work necessary in connection with existing instructions.

  • 3.3

    This essentially requires a firm, where it has not renewed or obtained qualifying insurance, and following the 30-day "extended indemnity period", to cease its legal practice—subject to paragraph 3 below, it will no longer be entitled to carry out legal activities (as defined under s12 LSA to cover the reserved legal activities, and any advice, assistance or representation in connection with the application of law or legal disputes).

  • 3.4

    However, an exception is made to permit the firm to meet its obligations under existing instructions and any work "necessary in connection with" existing instructions (the latter is to provide for the rare occasion in which new matters arise that are so inextricably linked to an existing instruction that the firm is professionally obliged to carry out the work and it would not be practicable for the client to seek an alternative firm to do so).

  • 3.5

    The term "existing instructions" has been defined to cover instructions from a client which have been accepted on terms that have been agreed before the cessation period commences. This ensures that the firm winds down its practice so far as possible and is permitted to undertake the minimum legal work necessary to meet its existing obligations: it will not cover those matters which have been discussed or accepted "in principle" but where negotiations are still under way and the firm is not yet committed to act. It also prevents "instruction creep" where one part of a larger job has been quoted for and agreed and further work arises from those instructions in which terms have not been agreed, and is severable (i.e. it is not necessary for the firm to act – as above).

  • 3.6

    The firm is entitled to undertake this limited range of work for so long as it is subject to the cessation period (i.e. until it ceases to practise, which it must do no later than 60 days after the end of the extended indemnity period, or until it obtains cover under a new policy of qualifying insurance on terms permitted under the SIIR). The firm's authorisation can be brought to an end once it ceases to practise: this would be automatic under rule 21.3(c) where the firm is wound up or ceases to exist, and under rule 22.1(a) authorisation may be revoked where the SRA is satisfied, for example, that the firm has no intention of carrying on the legal activities for which it was authorised.

  • 3.7

    Rule 1.2 has been amended to include the definition of "cessation period" by reference to the definition in the SRA Indemnity Insurance Rules 2012. This allows the definition term to adopt the defined terms within it (e.g. "extended indemnity period", "indemnity period", "policy", "qualifying insurance") by reference to the meanings set out within the SIIR.

  • 3.8

    Finally, the new rule 17.3 SIIR places an obligation on the firm to notify the SRA and its insurer as soon as reasonably practicable (and within five working days) on its becoming subject to cover under either the extended indemnity period or the cessation period. However, for transparency, we have provided a cross reference to that requirement in the guidance note to rule 8.7 Authorisation Rules (which rule deals with the general requirements on firms to submit information to the SRA as a term of their authorisation).

Question 3. Do you have any comments on the changes proposed to the SRA Authorisation Rules?

Compensation Fund Rules

  • 4.1

    The consultation draft of this document is attached at Annex D. Amendments to the Compensation Fund Rules currently in force, to give effect to the changes set out in the policy statement, are marked.

  • 4.2

    Rule 3 has been amended to confirm that discretionary grants may be payable from the fund in relation to loss/likely loss as a result of negligent acts or omissions.

  • 4.3

    The cover currently provided to firms under the assigned risks pool (and the side arrangement for uninsured firms) is for "civil liability" arising from "private legal practice" and is therefore wider than liability for negligence. However, the wording of the Legal Services Act 2007 restricts the fund's powers in this respect—its definition of "compensation arrangements" (section 21) comprises:

    • "arrangements to provide for grants or other payments for the purposes of relieving or mitigating losses or hardship suffered by persons in consequence of
      • (a) negligence or fraud or other dishonesty on the part of any persons whom the body has authorised to carry on activities which constitute a reserved legal activity, or of employees of theirs, in connection with their activities as such authorised persons, and
      • (b) failure, on the part of regulated persons, to account for money received by them in connection with their activities as such regulated persons".
  • 4.4

    The provision is also therefore harmonised across both recognised bodies and licensed bodies, to cover only "negligent" acts or omissions, albeit that the wording of section 36 Solicitors Act 1974 (as extended to cover recognised bodies) covers any acts or omission causing or likely to cause loss.

  • 4.5

    The phrase "act or default" referred to throughout the rules, covers negligent omissions, as the natural meaning of the word "default" covers "failure to act" or "inaction".

  • 4.6

    The new rule 3.3(c) covers the negligence of the body, individual, their manager or employee, but not an owner of the body. This is because, in contrast with the other categories (dishonesty/failure to account) the negligence of an owner—acting solely as an owner—did not appear to have potential for a claim in circumstances where the liability wouldn't be recoverable against another (who was in fact carrying out the legal work) or as a "failure to account" claim. This analysis is supported by the fact that owners are not included in the wording of s21(a) LSA which refers solely to negligence of "persons whom the body has authorised to carry on activities which constitute a reserved legal activity, or of employees of theirs".

  • 4.7

    A new rule 3.6 states that grants will only be made in circumstances where liability for the act/omission is not covered by a policy of qualifying insurance (including an ARP Policy and an ARP run-off policy), the Solicitors Indemnity Fund or any other insurance arrangements put in place by the ARP manager to cover uninsured firms. No grant will be payable for claims that will be covered by the extended cover arrangements: namely, in relation to all work undertaken in the extended indemnity period, or permitted work (on existing instructions) undertaken in the cessation period.

  • 4.8

    Rule 3.7 provides that payments may be made in respect of negligence arising from the acts or omissions of firms that should be authorised, but aren't, whether or not they have taken out qualifying insurance. This is because the client may not be protected by the firm's indemnity insurance cover in these circumstances. The position where authorisation is suspended or revoked is covered by rule 4(3) and (4).

  • 4.9

    The grants are discretionary, and the SRA will provide in guidance/operational terms for any relevant "exclusions" that would have applied to the ARP Policy (e.g. claims for death/PI) as well as adopt criteria to ensure that, where a claim on an insurance policy may be made, this is pursued.

  • 4.10

    There is no need for the loss to have materialised, or for there to be a finding of negligence by a court, however the SRA will need to assess liability and quantum, as against the test for negligence. The SRA will be able to exercise their discretion (a) to pay out early to mitigate any loss/further loss, or (b) to wait for any pending proceedings to have concluded, in order to establish negligence or the extent of any liability. This is foreshadowed by the provisions in rule 12, which permit the SRA to require the applicant to pursue a civil remedy, or to pay out before doing so. The recovery of costs is covered by existing rule 14.

  • 4.11

    Definitions have been included, for ease, by reference to the definitions within the SIIR, and minor consequential amendments have been made to rule 7 and 9.1.

Question 4. Do you have any comments on the changes proposed to the SRA Compensation Fund Rules?

Proposed changes not included in the April 2011 Policy Statement

  • 5.1

    In addition to the implementation of the decisions announced in the April 2011 policy statement, the SRA is seeking views on two further amendments to the QIA.

Credit ratings of qualifying insurers

  • 5.2

    As a part of its review of financial protection arrangements, CRA considered whether the SRA should require qualifying insurers to possess an independent credit rating. This approach is taken by some other regulators but has never been required by the SRA. In the December 2010 consultation paper the SRA announced its decision not to introduce such a requirement. It has been argued that such a requirement would reduce the risk to clients and to solicitors of a qualifying insurer becoming insolvent. However, the SRA's view has been that the regulation of insurers is a matter for the Financial Services Authority (FSA) and not the SRA (which does not have the necessary powers or experience to undertake this role) and that the requirement had the potential to be a barrier to entry and therefore reduce competition in the market. However, we have taken the view that the provision of better information by insurers to firms would be likely to reduce risk without damaging competition. Therefore we are proposing to amend the QIA to require insurers to confirm its credit and/or insurer financial strength rating (if any), or to state that it has none, and the identity of the rating agency that has provided the rating. The drafting achieves this as follows:

    • the "Details of the Insurer" section on the inside cover of the QIA 2012 is amended to require a qualifying insurer to provide details of whether it has a rating and, if so, with which rating agency; and
    • the QIA, clause 6.5, is amended to require a qualifying insurer to update any changes to its details set out on the inside cover within five business days of the change (see clause 6.5).

Question 5. Do you have any comments on this proposal?

Conformity of ARP Policy and MTCs

  • 5.3

    QIA Schedule 2 (the "ARP Policy") clause 4.10 is amended to address an anomaly which requires the ARP Policy to be amended to comply with the MTCs even where the ARP Policy and the MTC's are intended to be different.

Further Issues

Acceptance periods

  • 6.1

    A number of solicitors and the Law Society have raised the issue of insurers only leaving quotations open for very short periods. It has been suggested that this practice hampers the proper operation of the market and that a minimum period should be specified in the QIA. This approach is to be adopted in Ireland later this year when a five-day period is to be introduced. Views are sought on whether a similar approach should be adopted by the SRA and what the impact of such a step might be.

Cancellation of policies

  • 6.2

    In the 2010 review and subsequent consultation we sought views on the issue of whether policies should be cancellable for non-payment of premium or for misrepresentation in proposal forms. Our decision in April 2011 was not to change the current arrangements. It is our intention to reconsider this matter further in due course and views are sought on the issue at this stage, particularly in the context of the new arrangements that are being implemented in 2012/13.

Question 6. Do you have any comments on the issues raised in paragraphs 6.1 and 6.2?

Impact analysis

  • 7.1

    We published a draft equality impact assessment (EIA) alongside our December 2010 consultation and a final EIA alongside our response to consultation and policy statement in April 2011.

  • 7.2

    Since that time the profession and insurers have gone through the annual process of renewing PII which takes place on 1 October each year. This renewal has seen a dramatic change in the ARP. At the beginning of October 2010 some 411 firms had applied to enter the ARP as they had not obtained PII on the open-market. In October 2011 the equivalent figure had reduced dramatically to only 52 firms—and a number of these have already subsequently obtained cover on the open-market.

  • 7.3

    As set out in the April policy statement, one of the major objectives behind the SRA's decisions was to ensure the long-term sustainability of the open market system of PII. The continued existence of the ARP was identified as a major barrier to this objective and, therefore, the decision was taken to replace the ARP with the system of extended policy periods. This decision was taken in the light of the EIA which showed that BME owned and controlled firms were disproportionately represented in the ARP. The Board's view was that such firms would potentially benefit to the greatest extent from a more competitive PII market—particularly for small firms—even though the removal of the ARP would be reducing the options open to firms that were unable to obtain cover in the open-market.

  • 7.4

    Given this significant change we have revised and updated the April 2011 EIA to reflect this new information and would welcome any comments on this. View impact assessment

How to respond

By email

  1. Download and save the editable Word document below. Enter your responses in the editable fields provided after each question, and send the document as an email attachment to consultation@sra.org.uk.Please add in the subject line which consultation you are responding to.
  2. Please also attach a completed About you form.

Alternatively, email consultation@sra.org.uk, quoting the question numbers you are responding to—please also attach a completed "About you" form.

By post

Alternatively, print the questionnaire and "About you" forms, and send them to

Margaret Hope
Solicitors Regulation Authority
Ipsley Court
Berrington Close
Redditch
B98 0TD

Deadline for this consultation

Please send your response by 17 January 2012.

Summary of consultation questions

Question 1. Do you have any comments on the SRA's decisions, set out in the policy statement, which form the basis for the changes which we are now consulting on?.

Question 2. Do you have any comments on changes proposed to the QIA and SIIR?

Question 3. Do you have any comments on the changes proposed to the SRA Authorisation Rules?

Question 4. Do you have any comments on the changes proposed to the SRA Compensation Fund Rules?

Question 5. Do you have any comments on this proposal? (Credit ratings of qualifying insurers, paragraph 5.2)

Question 6. Do you have any comments on the issues raised in paragraphs 6.1 and 6.2?


Downloadable document(s)