Post six year run-off cover and the Solicitors Indemnity Fund
Updated: 24 November 2021
- Download the consultation paper or read it below
- The consultation period ends on 15 February 2022
- How to respond
About this consultation
The Solicitors Regulation Authority (SRA) is the regulator of solicitors and law firms in England and Wales.
We work to protect members of the public and support the rule of law and the administration of justice. We do this by overseeing all education and training requirements necessary to practise as a solicitor, licensing individuals and firms to practise, setting the standards of the profession and regulating and enforcing compliance against these standards.
We are the largest regulator of legal services in England and Wales, covering around 90% of the regulated market. We oversee some 212,000 solicitors and around 10,000 law firms.
The Law Society of England and Wales (TLS) established the SIF in 1987 under section 37 of the Solicitors Act 1974, for the purpose of providing compulsory professional indemnity cover to all solicitor practices in England and Wales.
In September 2000, following a vote of Law Society members, the SIF was placed into run-off following the introduction of an open market insurance model, which required firms to hold professional indemnity insurance (PII) with an insurer operating in the open market. The minimum terms for that insurance have always included a requirement that if a firm ceases without a successor firm, the last recorded insurer for the firm must provide cover for negligence claims made within six years of the firm closing. This is known as 'run-off cover'.
The SIF is made up of funds formerly contributed by the profession. It is administered by a separate company, wholly owned by TLS, Solicitors Indemnity Fund Ltd (SIFL).
Following being placed in run-off, the SIF has remained liable for:
- Claims made during the period a firm was covered by the SIF (1 September 1987 to 31 August 2000).
- Claims made after 31 August 2000 by law firms that ceased without a successor practice on or before 31 August 2000.
The above run-off cover is not time-limited and is not affected by this consultation. Irrespective of the outcome of the consultation, this cover will continue to be provided, whether by the SIF or by transferring the SIF’s outstanding liabilities to another party, such as a third party insurer. This would be funded using the SIF’s residual funds.
SIF also provides run-off cover to firms that ceased on or after 1 September 2000 once their six-year run-off cover has expired. This is known as supplementary run-off cover or post six-year run-off cover (PSYROC). This arrangement was put in place by TLS to run from 1 September 2007 (the point until which firms would be covered by their own mandatory six-year run-off cover) to claims notified before 30 September 2017. The cost of this cover is met out of the SIF surplus.
TLS's indemnification arrangements (along with its other regulatory functions) were subsequently delegated to us following our establishment in 2006. The operation of the SIF is currently governed by the SRA Indemnity Rules 2012.
The SRA's PSYROC provision
We set the minimum terms and conditions (MTCs) for professional indemnity insurance that regulated solicitor firms in England and Wales must buy on the open market and which participating insurers must provide. As noted above, this includes the requirement for firms closing without a successor practice to purchase six years run-off cover. The MTCs further require that the firm’s last insurer provides this level of run-off cover even if the firm does not pay the premium.
Historical analysis indicates that approximately 90% of run-off claims are made within a six year period. Six years is the usual limitation period within which professional negligence claims must be made in the courts, although this may be extended beyond six years in certain circumstances. There is a further long-stop limitation period of fifteen years, that may also be extended against a narrower set of criteria.
Further information on SRA MTCs and other supplementary information, including regarding limitation periods, is at Annex 1.
The purpose of PSYROC through the SIF is to provide cover for claims over and above the six year run-off period that is covered through the open market. Run-off cover (and PSYROC in particular) serves two principal purposes:
- it provides continuity of client financial protection (which is principally a regulatory function)
- it provides security for retired solicitors (sometimes referred to as the 'sleep easy' factor, which is principally a representative function).
The SIF (and PSYROC) fulfil a different function to that of our Compensation Fund, which compensates consumers for losses caused by ethical failures such as dishonesty. The Compensation Fund does not ordinarily make payments for incidents of negligence. There is though provision for it to do so, when the claim relates to a solicitor or firm that has not taken out the insurance required by our MTCs. More information on the role of our Compensation Fund can be found in the supplementary information at Annex 1.
We have extended the provision of PSYROC on three occasions. The first time was in 2012 when we agreed a three-year extension to cover claims notified before 30 September 2020. Our Board agreed a further a one-year extension in June 2020 and again in June 2021, extending the provision of PSYROC through the SIF until 30 September 2022.
Each time our Board has considered extending the provision of PSYROC through the SIF, it has carefully considered the affordability of doing so. It is important to note that based on actuarial advice that it has received, SIFL has informed us that it does not consider that the provision of PSYROC through the SIF for a further period is prudent, bearing in mind SIF Limited’s solvency policy, and without any additional funding.
In its note explaining its accounts at Annex 2, SIFL say that "based on actuarial projections and advice, the SIFL Board…. have concluded that a further extension would not be prudent". SIFL go on to explain that "SIF is not an insurer but in economic terms it operates as if it were and SIFL's directors assess its solvency on the same principles as would apply under modern insurance regulation. Its surplus can be quickly eroded by significant large events which by their nature are hard to forecast". Its approach is to use an external actuarial assessment looking at the number and value of claims that are likely to be made. It assesses a range of possible outcomes, with associated confidence levels, and the consequential requirements around prudential capital reserves.
These previous decisions focussed on the continuing provision of PSYROC through the SIF – an arrangement put in place some years before the existence of the SRA and now in runoff. However, these discussions raised the wider principled issue for us now, which is linked to but not dependent on our decision regarding the SIF: namely, whether our regulatory arrangements should include PSYROC. That issue has engaged us in core questions surrounding the primary purpose of PSYROC, our public interest role as a regulator, and the proportionality of establishing or maintaining a regulatory scheme to deliver PSYROC in light of the consumer protection it provides.
Accordingly, in the document below we have addressed the question of whether to maintain PSYROC through the SIF, chiefly in terms of proportionality, in light of its ongoing costs. We have also sought to explore alternative methods and models of providing PSYROC to consider whether a more proportionate option might be viable. In gathering detailed evidence in advance of the consultation, including independent expert analysis of historical claims data, it has become clear that the level of consumer protection that PSYROC would deliver going forward will be very small. Therefore we have come to the initial view that any alternative PSYROC model is likely to be disproportionate for us to deliver, through a regulatory scheme. You will see from the document below the reason for that view, and the questions we have posed to enable us to have the benefit of a wide range of views and any further relevant information before reaching a decision on the matter.
Q1: Do you have any views on our analysis in relation to continuing to provide PSYROC through the SIF on an on-going basis?
Q2: Do you have any further information relevant to our consideration of whether it is proportionate to consider providing PSYROC through the SIF on an on-going basis?
Q3: Do you have any views on our analysis in relation to amending our MTCs to require the provision of PSYROC on an on-going basis?
Q4: Do you have any further information relevant to our consideration of the benefits and disbenefits of amending our MTCs to require the provision of PSYROC on an on-going basis?
Q5: Do you have any further information about the potential for PSYROC cover on the open market as a voluntary option?
Q6: Do you have any views on our analysis in relation to establishing a master insurance policy for the provision of PSYROC on an on-going basis?
Q7: Do you have any further information relevant to our consideration of whether PSYROC should be provided on an on-going basis through a master policy? In particular, is there likely to be a suitable and cost-effective master policy available in the market?
Q8: Do you have any views on our analysis in relation to regulatory arrangements for an alternative model for the provision of PSYROC on an on-going basis?
Q9: Do you have any further information relevant to our consideration of whether there should be regulatory arrangements for PSYROC through an alternative model? In particular, do you have any information around the potential operating models for and costs of establishing and maintaining an alternative indemnity fund?
Q10: Do you have any views on our analysis in relation to options for regulatory arrangements that involve targeted on-going provision of PSYROC?
Q11: If you consider that there should be regulatory arrangements for PSYROC on an on-going basis, do you think that this should be targeted? If so, on what basis?
Q12: Do you have any information relevant to our consideration of whether any arrangements for on-going PSYROC should be targeted?
Q13: Do you consider that PSYROC should continue to be provided for within our regulatory arrangements? If so please give your reasons as to why, and through what mechanism (the SIF, an alternative indemnity scheme, a market insurance solution or other)?
Q14: Do you have any views on the actions that we propose to mitigate the risks to clients of closed firms not having PSYROC should that be the outcome of this consultation? Are there any other steps that we should consider?
Q15: Do you have information on impacts to inform our assessments?
How to respond
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- Consultation paper - Solicitors Indemnity Fund (PDF 24 pages, 226KB)
- Annex 1 Summary of PII provisions (PDF 3 pages, 127KB)
- Annex 2 SIF accounts information (PDF 4 pages, 260KB)
- Annex 3 Framework table (PDF 8 pages, 127KB)
- Annex 4 PSYROC analysis of options (PDF 131 pages, 4.1MB)
- Annex 5 Draft regulatory impact assessment (PDF 14 pages, 223KB)
- Annex 6 Equality Impact Assessment (PDF 9 pages. 378KB)