Compensation Fund is too tough on lenders, CML claims

The Council of Mortgage Lenders has used its response to the review of regulation by the Ministry of Justice to complain that too few claims by lenders on the Compensation Fund are successful.

Figures from the SRA show the fund paid out £5.64m in compensation in the second quarter of this year, the highest since the £5.97m paid out in the third quarter of last year.

The CML also claimed that indemnity insurers were not treating them properly, and aggregating claims "so as to reach liability limits unfairly".

In its response, the CML said: "A majority of our members have expressed concerns about the compensation arrangements provided by the SRA.

"In particular, they have reported that they have been held to a far more stringent set of standards when claiming from the Solicitor's Compensation Fund, than they would have been held to under their own regulator, and as a result, very few of the claims they have made have been successful.

"The discretionary nature of the fund is well understood by lenders, as is the notion of contributory negligence, but a lack of transparency around the decisions has led to the perception that lenders are, in some cases, being unfairly viewed as contributing to losses which are sustained primarily through the legal service provider.

"Long delays in dealing with claims were also reported, although we are aware that the SRA are working to clear the backlog of claims they have with the Compensation Fund."

A spokesman for the SRA said that the fund was discretionary and no claims would be accepted without proper evidence.

The CML also criticised the way indemnity insurers handled claims by lenders.

"Lenders have also had difficulty in obtaining compensation via indemnity insurance, where negligence is involved.

"Often claims will be aggregated by a professional indemnity insurer, particularly for solicitor's indemnity insurance, so as to reach liability limits quickly, which risks leaving the lender out of pocket."

The CML added that "boom and bust cycles had exposed weaknesses in legal compensation arrangements for the entire legal sector" and a "single set of compensation arrangements, which maximised efficiency" may provide better protection.