Impact assessment of the ARP enforcement action

6 June 2012

Introduction

One aspect of the Assigned Risks Pool (ARP) enforcement strategy introduced with effect from July 2010, was to "take steps to ensure that firms in the ARP pay their premiums or, if they do not, that they are managed out [of the ARP] promptly".

A year after the strategy had been in place, we reviewed progress and published a "one year on report" in July 2011. At that time we reported on the work that we had been doing to recover premium payments and the enforcement action that we were taking against firms still in premium default. We made a commitment to monitor the impact of this action.

Although in many cases regulatory action is still ongoing, we now have sufficient data to review the impact of this aspect of our enforcement strategy on ARP firms.

This report sets out the details of the action being taken against firms in premium default and considers whether there has been a differential impact on firms or individuals of different gender, ethnicity and age.

Background

The ARP

Solicitors are required by the Solicitors Indemnity Insurance Rules (the SIIR) to maintain a minimum level of professional indemnity insurance on the minimum terms appended to the SIIR. It is self evidently in the public interest that the insurance arrangements of solicitors' practices are regulated.

The SIIR however recognise that some firms may be unable to obtain insurance on the open market in a particular year and the ARP exists as an alternative source of insurance for a limited period for such firms. The ARP operates as a buffer providing time for firms with temporary insurance difficulties to obtain qualifying insurance and for those with greater difficulties to wind down their practice.

The costs of the ARP are partly covered by premiums paid by firms within the ARP and the balance is funded by qualifying insurers. Qualifying insurers are those firms who have signed up to provide insurance to solicitors' firms on the minimum terms. They inevitably pass this cost on to the rest of the profession in the level of premiums charged in providing qualifying insurance. The ARP is not an end in itself and its scope is limited.

Capita is the appointed manager of the ARP and acts as an agent of the qualified insurers. There is a management agreement between the SRA and Capita which obliges Capita (on behalf of the qualified insurers) to collect the ARP premiums due and there are various service level agreements for Capita to pursue unpaid premiums and where appropriate to commence debt collection action. Any debt collection action, which ultimately may culminate in bankruptcy proceedings being taken against the principals of a firm, is distinct from regulatory enforcement action taken by the Solicitors Regulation Authority (SRA).

The basis for any regulatory enforcement action by the SRA is Rule 10.3 of the SIIR which states that by applying to enter the ARP, the firm and any person who is a principal of that firm agrees to be jointly and severally liable to pay the ARP premium and any other sums due to the ARP manager under the ARP policy.

Rule 16 of the SIIR refers to the disciplinary consequences of failing to comply with the rules and Rule 16.2 states that it is a disciplinary offence for any firm or any principal of a firm to be in policy default after two months following the due date for payment.

The enforcement strategy

The ARP enforcement strategy is a sub strategy of the SRA's main enforcement strategy. This sets out in broad terms what our approach will be to enforcement under our new outcomes-focused approach to regulation.

The strategy sets out the outcomes we seek to achieve by enforcement, which include:

  • (a) credible deterrence of behaviours that breach the core principles (set out in the SRA Handbook),
  • (b) the encouragement and facilitation of compliance with the core principles and other regulatory requirements,
  • (c) control of firms that represent a risk to the public or the core principles,
  • (d) removal of those who represent a serious risk to the public.

Proportionate and targeted enforcement contributes to the achievement of these outcomes and will involve us taking robust and publicised enforcement action on priority issues. One of these issues is the non payment of ARP premiums. The SRA has become extremely concerned about the number of firms/individuals in the ARP who have failed to pay their insurance premium. The total of outstanding premiums for 2010/2011, excluding run off, was approximately £6.3 million.

The fundamental purpose of the ARP is to provide protection to the public by ensuring that clients have recourse to an insurance policy even if a firm does not have qualifying insurance outside of the ARP. It is not the purpose of the ARP to simply enable firms to continue in existence. The ARP is not designed to offer a more affordable or indeed equally affordable insurance option than insurance on the open market. It exists to protect clients and ensure confidence in the legal services market. Considerable damage is caused to the public interest by firms' continued failure to pay their insurance premiums.

Although the SRA has taken regulatory enforcement action against a number of individuals in the past for non payment of ARP premiums, our primary response to non payment was through the management agreement with Capita i.e. firms and individuals were pursued with the intention of recovering the outstanding premiums as a debt. However, with the difficult economic times, Capita took the view that many of these debts were not commercially viable to pursue. With the rising numbers of firms in the ARP (there were 26 firms in the ARP in 2007/2008 but 274 in 2009/2010) and with the increased levels of premium default, the non payment of premiums took on a new significance and our response was the ARP enforcement strategy.

As such, the ARP enforcement strategy flows directly from the SRA's enforcement strategy, by setting out our intention to take robust action against firms in default.

Engagement with ARP firms with outstanding premiums

Since the ARP enforcement strategy began, following notification from Capita, 134 firms have been identified by the SRA as being in policy default. All of these firms were written to and asked for an explanation for the non payment of their premiums. They were warned that disciplinary action might result from the non payment of their premiums.

In addition, visits to the firms were arranged with a view to constructive engagement as a means of resolving their premium default. The SRA recognises that payment of the ARP premium is a regulatory requirement and that failure to pay is a significant indicator of risk because it can suggest one or more of: financial difficulty, failure to recognise regulatory obligations, or poor business management. Such visits enabled the SRA to review general regulatory compliance and where appropriate, follow up other regulatory issues.

In the case of 36 firms, the premium was either paid in full or a repayment plan was agreed with Capita. The principals of an additional 19 firms owing premiums have been made bankrupt.

Enforcement tools open to the SRA

Of greatest concern to the SRA were the principals of those remaining firms which, for whatever reason, failed to engage or cooperate in any meaningful way with the SRA and/or Capita about their premium default. In many cases these firms also owed significant amounts of outstanding premiums.

In serious cases such as these, a solicitor's conduct may be referred to the Solicitors Disciplinary Tribunal (SDT). The SDT has the power to reprimand, fine, suspend or strike off a solicitor. Each case must be considered on its merits and in determining whether referral to the SDT is appropriate, the evidential and public interest tests set out in our published decision making criteria must be satisfied.

However, generally speaking, it is recognised that a breach of Rule 16.2 of the SIIR:

  • a) is a disciplinary offence which brings the solicitor's profession into disrepute;
  • b) has an impact on public confidence in the profession;
  • c) has an impact on other solicitors who are paying insurance premiums;
  • d) raises questions about the respondent's ability to properly manage their affairs.

To date the principals of 44 firms have been referred to the SDT following their failure to pay their assigned risks pool premium.

Summary of outcomes for ARP firms in default

Further to the commentary above, the schedule below provides a statistical analysis and more detailed summary of the eventual outcomes for the 134 firms which were identified by the SRA as being in premium default as a result of its ARP enforcement strategy. It must be emphasised that these figures are accurate as at the date of this report but that, as with any ongoing strategy, they are also subject to constant revision.

The tables are set out so that the totals for each group are set out across each row, to enable us to see the range of outcomes separately for each group and also across the whole group.

The columns represent the various self explanatory outcomes for each of the 134 firms. It is Capita that usually initiates bankruptcy proceedings and this process is separate from any disciplinary action that may be taken by the SRA. The firms counted under the waiver process column are those who have applied for or been granted a waiver of the rules and these applications are considered against set criteria on their own merits.

Ethnicity

Ethnicity Bankrupt Facing other regulatory action On hold Ongoing Paid / payment plan Referred SDT Waiver process Grand Total

BME Majority

1 (3%)

1 (3%)

(0%)

5 (13%)

12 (32%)

13 (34%)

6 (16%)

38 (100%)

White Majority

17 (28%)

3 (5%)

(0%)

4 (7%)

13 (22%)

17 (28%)

6 (10%)

60 (100%)

No Majority Group

(0%)

(0%)

(0%)

(0%)

4 (24%)

7 (41%)

6 (35%)

17 (100%)

Unknown majority

1 (5%)

(0%)

1 (5%)

(0%)

7 (37%)

7 (37%)

3 (16%)

19 (100%)

Grand Total

19 (14%)

4 (3%)

1 (1%)

9 (7%)

36 (27%)

44 (33%)

21 (16%)

134 (100%)

Age band

Age band Bankrupt Facing other regulatory action On hold Ongoing Paid / payment plan Referred SDT Waiver process Grand Total

22-30

(0%)

(0%)

(0%)

(0%)

2 (100%)

(0%)

(0%)

2 (100%)

31-40

2 (8%)

1 (4%)

(0%)

2 (8%)

5 (21%)

7 (29%)

7 (29%)

24 (100%)

41-50

3 (9%)

(0%)

(0%)

(0%)

10 (30%)

16 (48%)

4 (12%)

33 (100%)

51-60

1 (10%)

(0%)

(0%)

1 (10%)

3 (30%)

5 (50%)

(0%)

10 (100%)

61-65

1 (33%)

(0%)

(0%)

1 (33%)

(0%)

1 (33%)

(0%)

3 (100%)

65+

(0%)

(0%)

(0%)

1 (17%)

2 (33%)

2 (33%)

1 (17%)

6 (100%)

No majority group

12 (23%)

3 (6%)

1 (2%)

4 (8%)

13 (25%)

13 (25%)

7 (13%)

53 (100%)

Unknown majority

(0%)

(0%)

(0%)

(0%)

1 (33%)

(0%)

2 (67%)

3 (100%)

Grand Total

19 (14%)

4 (3%)

1 (1%)

9 (7%)

36 (27%)

44 (33%)

21 (16%)

134 (100%)

Gender

Gender Bankrupt Facing other regulatory action On hold Ongoing Paid / payment plan Referred SDT Waiver process Grand Total

Majority female

5 (21%)

(0%)

(0%)

2 (8%)

6 (25%)

7 (29%)

4 (17%)

24 (100%)

Majority male

12 (14%)

3 (3%)

1 (1%)

6 (7%)

25 (28%)

27 (31%)

14 (16%)

88 (100%)

No majority Group

2 (10%)

1 (5%)

(0%)

1 (5%)

5 (25%)

10 (50%)

1 (5%)

20 (100%)

Unknown majority

(0%)

(0%)

(0%)

(0%)

(0%)

(0%)

2 (100%)

2 (100%)

Grand Total

19 (14%)

4 (3%)

1 (1%)

9 (7%)

36 (27%)

44 (33%)

21 (16%)

134 (100%)

The first table ("Ethnicity") shows that 28% (17 out of 60 firms) of white majority firms have been made bankrupt whereas 3% (1 out of 38 firms) of BME majority firms were made bankrupt.

A slightly higher proportion of BME majority firms (32% compared to 22% of white majority firms) either paid their premiums or entered into an agreed payment plan with Capita following SRA action. This is encouraging and demonstrates that there has in many cases been positive engagement between Capita and firms identified as being in premium default often resulting in premiums either being paid up in full or the establishment of an agreed payment plan.

Ultimately just under a third (33% or 44 firms) of all firms in premium default were dealt with by way of referral to the SDT. On the figures presented in the table above, there were proportionately more BME majority firms referred to the SDT (34% or 13 firms) than white majority firms (28% or 17 firms). However, the picture changes if we remove the firms made bankrupt from the equation. Generally speaking, it would not be proportionate or in the public interest to refer to the SDT for non payment of their ARP premium a principal who has already been made bankrupt. If we remove the firms made bankrupt as a result of Capita's actions, there are proportionately more white majority firms referred to the SDT (17 firms out of a total of 43 which were not made bankrupt or 40%) as compared to BME majority firms (13 of a total of 37 firms or 35%).

We are continuing to monitor these cases to constantly ensure consistency of approach. This is achieved by agreed criteria for referral as well as the ongoing review of the circumstances of all cases proceeding to the SDT.

To date, 15 solicitors have now had their cases heard before the SDT following their failure to pay their ARP premiums. In 5 of these cases, the solicitors involved were suspended indefinitely by the SDT which also recommended that there suspension should not be lifted until such time as they had paid their premiums in full. In 2 cases the solicitors concerned each received a six month period of suspension. The SDT has also imposed fines of £10,000 and £8,000 respectively in 2 other cases and fines of £1,000 and £1,500 in another 2 cases. In the remaining 4 cases the solicitors were reprimanded. Each case which the SDT considers is fact sensitive and the sanctions imposed reflect this.

In some of these cases, the amounts owed were considerable, for example, in one of the more serious cases resulting in an indefinite suspension, the solicitor concerned owed £179,167.67. She had not made any payments to Capita and failed to respond to correspondence from the SRA when the matter was raised with her. In another the solicitor owed premiums totalling some £22,674.17. He had not engaged with Capita or the SRA in respect of the outstanding premium and was also suspended indefinitely.

Conclusions

Carrying out this assessment has helped us to evaluate the effectiveness of our ARP enforcement strategy and supports our initial conclusion that the strategy would not have a disproportionate negative impact on BME firms. Although the strategy has led to serious outcomes for many firms in premium default, with 47% facing bankruptcy or referral to the SDT, it has also prompted 27% of firms to pay or enter into arrangements to pay their premiums. The analysis shows that BME firms are:

  • (a) under-represented in the firms made bankrupt by Capita;
  • (b) under-represented in the remaining firms which were referred to the SDT by the SRA; and
  • (c) overrepresented in the firms paying their premiums or entering a payment plan.

Over the coming months the SRA will continue to review and report on the outcomes of the ARP enforcement strategy and its impact on firms or individuals of different gender, ethnicity and age.

Print page to PDF