Assigned risks pool – enforcement strategy

Summary

• 1.

  At its June 2010 meeting, the SRA Board identified that further work should be undertaken to tighten the management of those firms in the Assigned Risks Pool (ARP), including those firms who were not paying premiums. One of the concerns expressed by both the profession and the insurers was that inadequate action was taken to manage firms within the ARP.

• 2.

  At the July 2010 meeting of the Board, this Enforcement Strategy (ARP) was approved. The strategy sets out a programme of action to:

  • a)

    Tighten the monitoring and supervision of firms in the ARP;

  • b)

    Improve the incentives to firms to manage themselves out of the ARP;

  • c)

    Take steps to ensure that firms in the ARP pay their premiums or, if they do not, that they are managed out promptly;

  • d)

    Increase the SRA's capacity to manage the ARP, particularly to guard against the possibility of a large increase in the ARP at the time of renewal of policies (October).

Background

• 3.

  There are currently 212 firms in the ARP. Of those firms:

  • a)

    60 are in their second year, and will reach the end of their eligibility for ARP cover (unless it is exceptionally extended) in October;

  • b)

    152 firms are in their first year in the ARP.

• 4.

  Under the current system, firms entering the ARP are risk assessed using the SRA's published process. On the basis of that risk assessment, the high-risk firms receive a Forensic Inspection visit, medium-risk firms receive a supervisory visit, and low-risk firms are subject to desk-based monitoring. Monitoring continues throughout the firm's membership of the ARP.

• 5.

  The collection of premiums, and the administration of the ARP (as distinct from regulatory action) is outsourced to Capita. All Qualifying Insurers are required to be insurers of the ARP, and this may act as a disincentive to enter the market. Currently, 81 firms in the ARP have not paid their premiums. The practice since the inception of the ARP has been that decisions on whether or not to pursue non-payment of premiums have been made by Capita on the basis of commercial criteria discussed with the insurers.

• 6.

  For most of the years during which the ARP has operated, the Pool has been relatively small and the management of the Pool – with the exception of those firms classified as high risk – has been reactive. Again, this approach is in need of urgent review.

Issues

• 7.

  The major increase in the ARP, coupled with the tightening of the insurance market, has focused attention upon the ARP. The costs of the ARP now represent in excess of 15% of the total costs of solicitors PII. This not only causes resentment, but adds to the risk that more firms will be unable to afford cover on the market, in turn increasing the size of the ARP. Furthermore, firms which fail to pay their premiums may be demonstrating financial instability and therefore increased risk, and add to the resentment of the profession and insurers.

• 8.

  There are therefore powerful reasons to ensure that:

  • a)

    The SRA is able to manage the risks associated with an enlarged ARP;

  • b)

    The costs of the ARP are managed down as far as possible;

  • c)

    Every effort is made to recover premiums from firms in the ARP, with effective sanctions to deal with those firms which do not pay.

• 9.

  In undertaking these tasks, the SRA must demonstrate that:

  • a)

    It is applying a risk-based approach;

  • b)

    It is acting fairly.

Enforcement tools available to the SRA

• 10.

  In addition to the usual tools available to the SRA in dealing with firms, there are additional powers in relation to the ARP:

  • a)

    Failure to pay a premium is in itself a disciplinary offence (though disciplinary proceedings are subject to elaborate processes, and do not provide swift solutions);

  • b)

    Those failing to pay a premium may be made subject to practising certificate conditions;

  • c)

    Firms which do not pay the ARP premium can be deemed ineligible for the ARP on renewal.

• 11.

  Failure to pay the premium can be grounds for an intervention, but the SRA must also demonstrate that intervention is necessary in the public interest (i.e. failure to pay the premium is not in itself sufficient). The view of the SRA is that it would not be proportionate to deem that non-payment of premium should automatically trigger the exercise of intervention powers, although the possibility of intervention will always be considered.

Proposed enforcement strategy

Firms in the second year of ARP

• 12.

  The firms in their second year in the ARP are the first priority. The high risk firms are already the subject of major regulatory action (including FI inspections and SDT hearings). The remaining firms will be contacted by the end of July to explain their options, and will have a designated contact point in the SRA who will assist them in finding alternative cover and advise them on their options for wind-down. Those firms that fail to respond will be subject to prompt follow-up action. An intervention schedule will be drawn up by 31st August to ensure that any firms whose position has not been resolved before the end of the two-year period will be managed out of the ARP within two months from 1 October 2010.

Firms in the first year of ARP

• 13.

  Of the firms in their first year in the ARP, those that have been classified as high risk, are the subject of intensive scrutiny and/or formal action. The firms, classified as medium risk, have been subject to scrutiny and/or regulatory action, and will continue to be monitored closely. The remaining firms classified as low risk, are the subject of continuing desk based assessment. These firms have a limited or even no client base, low fee income, and an inactive client account (if any).

• 14.

  We are stepping up action in relation to those firms which have not paid their premium (whatever their risk rating). All such firms will be approached by the end of July and warned that if they do not pay their outstanding premiums promptly we shall take further regulatory action (which may include disciplinary sanctions, PC conditions and inspections), and that in any event we shall deem them ineligible for a second year in the ARP, requiring them to close down or be subject to intervention. Again, an intervention schedule will be drawn up by 31 August to ensure that any of these firms whose position has not been resolved before renewal will be managed out of the ARP within two months from 1 October 2010. The issuing of waivers from the payment of premiums will be kept to an absolute minimum.

• 15.

  Additionally, discussions are in hand with Capita so that firms which have not paid their premiums can be pursued through standard legal proceedings. (Since the establishment of the ARP, decisions on whether to pursue premiums have been a matter left to Capita, in discussion with the insurers, but the SRA has determined that that should now change.)

Firms entering the ARP for the first time in October 2010

• 16.

  Firms entering the ARP in October 2010 will be required to pay their premiums promptly, and any that do not do so will be subject to priority investigation and regulatory action as appropriate.

Timetable and possible announcement

• 17.

  A timetable setting out the key steps in the Strategy is set out below.

  July 2010 onwards

  Intensive action on all high-risk firms continues.

  July 2010

  All firms approaching the end of their two-year period sent letter seeking their plans for leaving the ARP, and offered assistance in finding cover/orderly wind-down

  Firms approaching end of first year in ARP who have not paid their premiums sent warning letter, stating that failure to pay promptly will lead to regulatory sanctions, which may include disciplinary action and/or PC conditions, and that they will be declared ineligible for a second year in the ARP and closed down.

  Tendering process for new outsourced forensic inspections

  Aug/Sept 2010

  Firms responding to July letters assisted to rectify their positions through market insurance, disposal, orderly wind-down

  Further investigation of firms failing to respond, including regulatory sanctions

  Intervention schedule for non-payers drawn up

  Outsourced forensic inspections begin

  October 2010

  Firms who have been in ARP previously but have not paid their premiums declared ineligible for ARP. Interventions proceed unless disposal or wind-down achieved

  Firms entering ARP for first time reminded of obligation to pay premium, and regulatory consequences of failing to do so. Risk analysis of new firms undertaken.

  Regulatory action begins in relation to high-risk new firms in ARP

Increasing capacity

• 18.

  The SRA will need the ability to secure increased forensic inspection capacity, both to assist with the enforcement strategy set out above and to ensure that we can deal with any major increase in the ARP in October.

• 19.

  We have approached three major firms, who have indicated that they have the expertise to provide call-down forensic inspection capacity at short notice. We intend to secure these services (subject to tendering) in August, with the aim of trialling the use of outsourced inspection well in advance of the October renewal. In addition to increasing capacity, this outsourcing would have the advantage of benchmarking the cost and quality of our existing capacity.

Equality and Diversity implications

• 20.

  A full equality impact assessment was undertaken in relation to the proposed reforms of the Assigned Risks Pool. Further work has been done to produce an Equality Impact Assessment on the Enforcement Strategy. This is available on request.