Equality impact assessment

Introduction

• 1.

  The SRA is consulting on 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.

• 2.

  We published a final equality impact assessment alongside our response to the consultation on the future of client financial protection and the Policy Statement in April 2011.

• 3.

  The proposed changes are to be introduced over a three year period and a number of them have been introduced for the 2011/12 indemnity year, such as the reduction of the time that a firm is able to stay in the Assigned Risks Pool (ARP) from 12 to 6 months. The main changes due for implementation from October 2012 are:

  • the closing of the Assigned Risks Pool (ARP) as a provider of policies of qualifying insurance from 30 September 2013;
  • 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;
  • 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.
• 4.

  The current consultation is about the implementation of decisions made as a result of the client financial protection review which are explained in the Policy Statement. We have not identified any particular impact on equality arising from the rule changes which are proposed to achieve that implementation.

• 5.

  However, to assist the consultation process, we have included in this report, a summary of the relevant findings from the equality impact assessment of the decisions made and published in April 2011. We will first look at our conclusions about the main change that has already been made, namely the reduction in the time allowed in the ARP from 12 months to 6. We will then look at our conclusions on the potential impact of the proposal to replace the ARP with alternative arrangements with effect from October 2012.

• 6.

  We will update the information provided where we can (including details of the new ARP firms for 2011/12) and evaluate our earlier conclusions in the light of this.

Reducing the duration of the time allowed in the ARP to 6 months

• 7.

  From October 2011, firms are only able to stay in the ARP for a maximum of 6 months. On the basis of the data available at the time (largely based on the fims in the ARP in the 2010/11 indemnity year) we concluded that this (and the longer term plans to replace the ARP with alternative arrangements) would have a disproportionate impact on BME firms. We did not have any evidence to suggest that there would be any other significant impacts on equality for other groups who share one of the protected characteristics and there was insufficient evidence available to assess whether there would be an adverse impact on access to justice.

• 8.

  We considered that maintaining the ARP unchanged was not an option as it was having a significant negative impact on the operation of the insurance market which was causing unnecessarily high insurance costs for all of the profession, restricting competition in the market and, if unchanged, would lead to the current system of open market insurance becoming unviable.

• 9.

  We determined that our proposals were a proportionate means of achieving a system which would best deliver client protection in accordance with our regulatory objectives and the professional principles which are set out in the Policy Statement.

• 10.

  The initial reaction to our proposals from the insurance industry was disappointment, as many felt that implementing our decision to replace the ARP over three years was would not result in fast enough change. It was predicted by some that, as a result, the profession and the insurers in this market were likely to face yet another very difficult year. Equally, stakeholder representing BME solicitors were disappointed that we were introducing another reduction before the impact of the earlier reduction from two years to one year for the 2010/11 year had been fully assessed. Nevertheless, our view was that the changes announced and the implementation timetable struck the right balance and that any disproportionate impact on BME firms from limiting (and then closing) the ARP would be mitigated by a more competitive insurance market which would lead to fewer firms being unable to obtain open market insurance in the first place.

• 11.

  Having just completed the renewal round for the 2011/12 indemnity year we can see that this has, in fact occurred. Only some 52 firms entered the 2011/12 ARP, as compared to a figure of some 411 at the outset of 2010/11. The number of firms in the ARP for 2011/12 is currently 49 (as at 13/10/2011). Within this number we can also see (Appendix 1) that BME firms are not disproportionately represented in the 2011/12 ARP.

• 12.

  This year there was active competition to write PII for small firms particular from the recently entered and new insurer entrants who were pricing aggressively and could take a different view because they did not have a claims legacy. We believe that our demonstrative commitment to tackle the problems caused by the high cost of the ARP, albeit over a three year period, has played a part in improving the availability and cost of PII for small firms.

Updated equality impact assessment of the decision to close the ARP with effect from October 2013

• 13.

  The cornerstone of the approach that we have adopted (as set out in the Policy Statement) is the closure of the ARP as a provider of insurance with effect from October 2013 and the implementation of alternative arrangements.

• 14.

  As with the proposal to reduce the time allowed in the ARP to 6 months, we concluded, based on the data available at the time, that although this was likely to adversely impact on BME firms our approach was proportionate and legitimate in all the circumstances.

• 15.

  We based these conclusions on the evidence summarised in the following paragraphs and we have updated this with new evidence that has since become available.

Breakdown of the current ARP

• 16.

  The over representation of BME firms in the ARP was the underlying reason why changes to the ARP arrangements were judged to be likely to have a disproportionate impact on BME firms.

• 17.

  In the table set out in Appendix 1, we have provided an equality breakdown (by ethnicity, age and gender) of ARP firms for the current practising year and the previous two practising years, setting out for each year the percentage that each group represents in the overall firm population for comparative purposes.

• 18.

  The number of firms in the ARP can change from day to day and does not usually stabilise until after the first 30 days of the new practising year. Until that time, firms who are in the ARP may finalise arrangements for insurance cover on the open market and if so, will be treated as if they were never in.

• 19.

  This year the proportion of firms in the ARP broken down by ethnicity closely follows the similar breakdown for the profession as a whole in contrast to the positions February 2010 when 38% of the ARP firms were BME and 42% in February 2011. Even though the numbers are very small, this is a welcome development although we will continue to review the equality breakdown of this years ARP as the numbers will change quite rapidly at this stage of the practising year.

Previous research by Charles River Associates

• 20.

  The Charles River Report found that, based on the data available at the time, closure of the ARP as a provider of qualifying insurance would have a disproportionate adverse impact on BME firms. We concluded that it was for the SRA, in consultation with stakeholders, to balance the cost and wider implications of retaining the ARP against the adverse impact identified.

• 21.

  The Policy Statement provides our own analysis of the impact the ARP is having on the market, concluding that the ARP is in fact distorting the market to the detriment of the profession, in particular small firms, including BME firms.

• 22.

  As set out above, we feel that our proposals to tackle the ARP have at least in part led to the improved experience and outcome of this year's renewal.

Consultation feedback

• 23.

  Feedback from the earlier consultation indicated that there was a majority of support from the profession and our wider group of stakeholders for closing the ARP as a provider of qualifying insurance and for reducing the time spent in the ARP. Although very much in the minority, there were also strongly-held views in support of the ARP from BME groups arising from their concern that there was racial discrimination in the professional indemnity insurance market and reduction or removal of the ARP safety net would leave BME firms exposed.

• 24.

  We will take into account further feedback provided in response to our current consultation and will update this section in our final equality impact assessment.

Our experience of regulating ARP firms

• 25.

  We considered our experience of regulating the ARP firms, which has been guided by our ARP enforcement strategy since July 2010.

• 26.

  In accordance with the strategy, we have been proactively engaging with ARP firms and taking regulatory action where necessary. We have been closely monitoring the impact of this strategy and reported on progress after one year. The report looked at three aspects of the enforcement strategy and concluded as follows:

  • Our closer monitoring and supervision of ARP firms has encouraged and supported firms to obtain market insurance and has encouraged firms to close in an orderly fashion rather than through intervention;
  • The impact has not disproportionately impacted on BME firms who were proportionately more successful in obtaining market insurance in 2010/11 than White firms (although they were proportionately more likely to re-enter the ARP);
  • There has been some improvement in the recovery of ARP premiums and we are taking firm action against those firms which are not paying, although we are taking measures to speed up the process.
• 27.

  An updated set of data relating to the outcomes for ARP firms in the pool during the last practising year is set out in the table below.

  Ethnicity	Open and covered	ARP cover expired - market insurance	Closed (including intervention)	Grand Total
  BME Majority	89 / 39.4%	9 / 56.3%	13 / 19.4%	111 / 35.9%
  White Majority	91 / 40.3%	4 / 25.0%	32 / 47.8%	127 / 41.1%
  No majority group	30 / 13.3%	1 / 6.3%	14 / 20.9%	45 / 14.6%
  Unknown majority	16 / 7.1%	2 / 12.5%	8 / 11.9%	26 / 8.4%
  Grand Total	226 / 100.0%	16 / 100.0%	67 / 100.0%	309 / 100.0%

   

  ARP positions as at 01/09/2011. Includes all firms covered by the ARP at some point in 2010-2011.

• 28.

  In the July report on progress against the ARP enforcement strategy, we confirmed that we would be taking the same approach to monitor and supervise firms in the ARP from October 2011 this year, although this would be adapted to allow for the fact that they will be able to practice only for 6 months rather than 12 months.

• 29.

  The dedicated ARP working group at the SRA will remain in place and continue to review the position of the 2011/2012 firms. The timetable for the enforcement strategy for 2011/2012 will be a truncated version of the current strategy given that maximum period a firm can remain in the ARP has been reduced to 6 months. It will commence with a risk assessment of all firms entering the ARP in October 2011. However, it should be noted that historically a number of firms enter the ARP but then are able to obtain open market insurance within the 30 days allowed for policies to be backdated.

Concerns about discrimination in the professional indemnity insurance market

• 30.

  A summary of the allegations and evidence of differential outcomes and discrimination against BME firms in the professional indemnity insurance market is set out in the report at Appendix 2 to the April equality impact assessment report. An update was prepared and reported to the SRA Board in July 2011.

• 31.

  In summary, we are still awaiting guidance for insurers on compliance with the Equality Act from the Association of British Insurers (ABI) and for the ABI to coordinate publication of aggregated industry data on some of the risk factors of greatest concern to BME solicitors.

• 32.

  As guardians of the professional indemnity insurance arrangements for the profession, the SRA will continue to facilitate and support the work being done in this area and take action to investigation any specific complaint that may be brought to us about qualifying insurers.

Law Society Research

• 33.

  The Law Society has now published the results of the survey of firms' experience of the renewal round for 2010/11 and we had sight of it after it was published on 21 July 2011. The Law Society summarised the findings as follows:

  "Our recent survey into professional indemnity insurance (PII) renewals found that more firms had difficulty renewing their PII in 2010 than in 2009 and more reported an increase in premiums.

  "The survey revealed that 63.5 per cent reported no renewal difficulties in 2010 compared to 79 per cent in 2009, while 69.3 per cent experienced a premium increase in 2010 compared to 62 per cent in 2009.

  "The survey found no evidence of direct discrimination by insurers against black and minority ethnic (BME) law firms. However it did identify differences between BME and other firms which may indicate possible indirect discrimination. As in previous years BME firms are more likely than others to rely on the Assigned Risks Pool for cover."

• 34.

  The report compares the experience of small BME firms with small non BME firms and noted a number of factors that may be indirectly affecting BME firms, such as

  • BME firms were seven times more likely to state that they were required to submit CVs;
  • BME firms were more likely to have one or more partners admitted through the qualified lawyer transfer scheme (which is the process through which barristers and lawyers qualified overseas;
  • BME firms were more likely to have one or more partners who had less that five years' qualification.
• 35.

  However, the report also concluded that a firm's size, claims history and changes in the number of fee earners were the factors which had the most impact on premiums. In summary, the picture emerging from the 2010 report reflects an improvement as compared to 2009 but there are still factors affecting BME firms which are of concern and which need to be monitored.

• 36.

  We agree with the conclusion that we reached in our April equality impact assessment which was that

  • "..we had to balance the potential adverse impact on equality of the proposal to remove the ARP as a provider of insurance staged over three years as against the benefits for consumers and the profession (including the majority of BME firms that do obtain open-market insurance) that the proposal will bring".

Mitigating the impact

• 37.

  In our April equality impact we identified the followings ways that we could mitigate the impact of the potential adverse impact identified:

  • i. By delaying final closure of the ARP as a provider of insurance for two years, although we acknowledged that this will still involve adverse impact from October 2011;
  • ii. Through the increased engagement we are having with firms as part of our overall ARP enforcement strategy, which is helping us to more efficiently and effectively manage high risk and "failing" firms out of the ARP, whilst at the same time constructively engaging with firms which are low risk and have the potential to rehabilitate themselves back into the open market.
  • iii. By continuing our work with the ABI and insurers as they take forward their own work to ensure that their underwriting arrangements are appropriate given the equalities requirements on them.
  • iv. Through the work that we will be undertaking to help firms implement our outcomes-focused regulation which will help firms focus much more clearly on the identification and management of their own risks.
• 38.

  We have addressed the first three mitigating factors above. In relation to the final factor, our new Handbook is now in force and our authorisation and supervision functions, which will facilitate our outcomes focused approach are well developed. We have accepted that we have been less rigorous that we perhaps should have been in our decisions as to which firms should be able to practice in the first place. Our new approach will require firms to plan their businesses better—developing business plans, being more risk-aware and thinking through the approach and policies that best suit their firm. We anticipate that in the longer term, this will help firms represent themselves better to insurers and give the insurers improved confidence in the SRA.

• 39.

  We hope that this will mean in the longer term that there is less of a gap in the boundary between the firms the SRA is allowing to practise and the firms which the insurers are prepared to support. It is the firms which fall outside the more tightly-drawn barrier imposed by the insurers which are potential candidates for the ARP.

Promoting good relations

• 40.

  Our statutory duty includes the need for us to have due regard to promoting good relations between equality groups. We have previously identified the risk that adverse publicity about ARP firms could threaten relations between BME firms and non-BME firms given that there is a disproportionate number of BME firms in the ARP.

• 41.

  We recognised that there was more that we can do to ensure that we make information available to the profession about the ARP and the work that we do to pursue our published ARP enforcement strategy.

• 42.

  We have now published the ARP enforcement strategy progress report on our website. We have also published statistics indicating the status of ARP firms as at 1 September 2011 and how many firms have paid their ARP premiums, These statistics will be published quarterly.

Conclusions

• 43.

  We have not identified any impact arising from the rule changes that we are proposing to implement the decisions made in April 2011. We have nevertheless published this report to ensure that there is up-to-date information about the assessment we concluded in April about the decisions made.

Appendix 1 - ARP firms in Feb 2010, Feb 2011 and Oct 2011 as compared to the overall solicitor firm population

Ethnicity

Age band

Gender