Knowledge Centre

New cap on compensation fund to stem biggest losses

Written By - Liam Bolton - February 14,2020

The Solicitors Regulation Authority will seek to end multi-million payouts through the compensation fund in the midst of soaring burdens on the profession to prop it up.

Measures were proposed today to make the fund more sustainable in the face of growing risks and ever-increasing demands for compensation from wronged clients.

Plans include reducing the single claim limit to £500,000 (barring exceptional circumstances) and capping the total amount payable for a group of related claims.

New eligibility criteria will focus on people that need most protection. Plans for a hardship test have been dropped, but the scheme will prioritise payments based on the 'impact of loss'. Clients who have been able to claim on a law firm’s professional indemnity insurance policy are also likely to be excluded.

Successful applicants must be the direct client of solicitors or firms who have done wrong - for example, therefore, buyers who have lost money because of the dishonesty of their seller's solicitor in a conveyancing transaction would not be eligible. Neither would spouses in a divorce matter where the other solicitor is holding and then steals money set aside for a financial settlement.

Paul Philip, SRA chief executive, said the compensation fund provides an essential safety net for those who need it, helping to maintain trust in the profession when things go wrong. But he stressed that funding the scheme comes at a cost, which is borne by the wider profession and ultimately their clients.

Philip added: ‘We have seen how significant risks in the market over recent years, including solicitor involvement in dubious investment schemes, have affected the fund and contributions from the profession.

‘We want to strike the right balance between protecting clients’ money and making sure that the fund remains sustainable for the future.’

The regulator fears the potential liability of the fund is set to increase and is building a £30m contingency reserve for anticipated payments. This follows considerable spikes in levels of contribution from the profession.

In total, the solicitors profession paid £25.6m into the fund in 2018/19, with firms contributing £1,680 and individuals £90. In comparison, for 2010/11 firms paid £120 and individuals £10 each, resulting in a total contribution of £2.1m.

A revised £500,000 limit will affect a relatively small number of cases. From 2010 to 2018, a total of 32 cases paid out more than that figure, with a total value of £30m. Almost all these higher single payments involved stolen probate and mortgage monies or damages settlements. The highest individual compensation award in this period was for £3.9m.

The SRA maintains the scheme remains generous compared with funds operated by other legal services regulators, but there will be criticism that clients suffering major losses at the hands of their solicitors will be left out of pocket.

Having consulted in 2018 on the principles of the fund, the SRA has now opened a 12-week consultation to ask about the specific proposals. Any changes would require the approval of the Legal Services Board.

The Legal Services Consumer Panel said it was concerned about proposals to reduce pay-outs from the compensation fund.

A spokesperson said: 'We will consider the SRA’s proposals carefully and respond to the consultation paper in due course. It is however important to emphasise that the requirements for solicitors to contribute to the compensation fund offers protection to solicitors and consumers alike.

'It allows consumers to contract with greater confidence, peace of mind and protection against financial loss. Any reduction in consumer protection of this significance must be justified with evidence, and a thorough analysis of the risks and benefits. This is what we expect to see in the SRA’s impact assessment.'