The SRA announced on Wednesday that it would not be extending beyond 2020 the existing arrangements for post-six year run-off cover. Under these, the reserves from the old Solicitors Indemnity Fund (SIF) are used to cover claims against solicitors and firms that have ceased practice, after their six year run-off cover ends. Those solicitors won’t be covered for claims arising after 2020.
For most firms and solicitors, this decision is of academic interest. However, it might well cause worry to those people who’ve closed their firms down already and those who are thinking of doing so.
It’s a remote risk. Most claims come in well before the end of the six year period. But the fact that the SIF still deals with claims arising outside that period suggests that the risk is still there. After all, the six-year limitation period is anything but a complete defence to a claim coming in later.
Why do something?
The SRA had to do something about this. The SIF reserves will run out in the early 2020s and it needed to work out what happened next. None of the options would be that palatable: to levy the profession to continue the protection; to extend the compulsory run-off requirement (for how long?); to let the market sort it out; or to extend the arrangements and risk the SIF money running out.
The decision to stop it now is obviously the easiest, given that the SRA was under pressure to reach a decision quickly and the impetus is to reduce the costs of practice and, indeed, of leaving practice.
However, Paul Philip’s comment was interesting. He said “We consulted on reducing the amount of run-off cover because many see it as a barrier to closing down, and that’s still something we want to look at. Extending cover through SIF would be contrary to that aim and would be suggesting that six years run off cover is not enough”.
“Not enough” for what? It may be a pragmatic point at which you can be satisfied that the bulk of claims will be met because of the limitation rules and where it’s disproportionate to require longer cover from a regulatory point of view. But it’s certainly not enough if (a) you’re a solicitor wanting to sleep easy in your retirement; or (b) a consumer with a claim arising outside the period and the solicitor is not worth suing. Moreover, the SIF protection did not add to the costs of exiting.
What this arrangement did, as well as ensuring peace of mind for solicitors, was to ensure that consumers did not suffer detriment in the relatively few cases that arose. You might think it’s surprising that the SRA hasn’t dealt with what will happen here.
At the moment, there is no product on the market to take firms beyond the compulsory six year period. There hasn’t needed to be. My understanding was that insurers didn’t much like run-off arrangements: the risk is hard to assess and there is nothing that anyone can do to mitigate it. Equally, there must now be some sort of market for it and it would be astonishing if insurers didn’t produce some product or products to fill the gap.
Whether that will be sufficient to cover the gap is open to question. Given the Paul Philip’s statement, it seems unlikely that the SRA will make such cover mandatory and insurers themselves might want to cherry-pick the risks. I wonder if cover will be available or affordable if you’ve had a claim during the run-off period. And, faced with expensive cover, many solicitors may decide to take the risk.
The SRA is still looking at the question of client protection – though rather quietly. It’s no secret that it would like to reduce the costs of leaving the market and, even, to reduce the compulsory run-off period.
The problem that they have is that this will inevitably mean that some solicitors will not have insurance in place for claims that come in after the compulsory period ends and may not be worth suing. This leaves consumers, who would have been in no position to second-guess this, without redress. Is this an outcome that the SRA wants?
In theory, the Compensation Fund could accept claims where the solicitor wasn’t good for the money. But doesn’t this end up with the profession paying anyway, though possibly in a smaller number of cases?
Still work to do
Reducing the costs of exiting the market is obviously laudable: a good number of solicitors can’t do so, it is alleged, because of the cost of run-off and because their practices are simply unattractive to sell on. It might be that those are the very ones most in need of run-off cover beyond the six years.
However, sensible solicitors will want to take out insurance beyond the six years and the likelihood is, that if the market does cover this, the overall costs for them of getting out of the market will increase.
Meanwhile, what happens to what is probably a small number of consumers who may be left high and dry? The SRA does need to come up with an answer to this, at the very least by 2020 – even if it’s only to wash its hands.
This announcement brings an element of certainty to position, but a number of retired or potentially retiring solicitors will be worried as might some consumers, if they were aware of it. The SRA’s future review needs to bring some certainty to them. I suppose they have until 2020 to sort it.