Conveyancers could operate without insurance under latest SRA proposal

The SRA has unveiled a set of radical reforms including scrapping the single renewal rate for professional indemnity insurance, removing financial services work as a compulsory insurance element, and reducing the time firms are allowed in the assigned risks pool '“ all of which are due to come into effect from October next year.

The proposals follow recommendations by Charles River Associates (CRA) that the Solicitors Regulation Authority should only intervene in case of market failure, signalling a move towards a smaller role for the SRA as it prepares the regulatory framework for the arrival of alternative business structures.

A leftover from the days of the Solicitors Indemnity Fund, the single renewal date for PII will be the first major change to take place.

Scrapping the single renewal date is expected to bring an end to the annual scrum that saw firms struggle to secure insurance by 1 October deadline and insurers drowning in last minute requests. Freeing firms to choose their renewal date would also lead to greater competition.

A situation that typically did not address a market failure, the single renewal date also appeared to cause a number of firms to fall into the assigned risks pool, according to the SRA.

This will not resolve all the problems with the ARP, which is the second main change the SRA is consulting on. Although it is determined to do away with the single renewal date, the SRA has not come to any firm decision in relation to the funding mechanism for the ARP.

One key change is to reduce the time a firm is allowed to stay in the ARP from 12 to six months. Once in the ARP there would be greater focus on rehabilitation '“ unless a firm is evidently not going to survive, in which case the SRA will work with the partnership to achieve an orderly winding down of the practice.

Presently firms in the ARP are expected to work towards securing insurance on the open market but the SRA will now want to see more evidence of the firm's effort to take active steps and, if necessary, appropriate structural measures to transform the firm so that it can remain a viable practice. SRA head of standards Richard Collins said the regulator would be working on specific requirements that could include firms providing regular progress reports and action plans.

High street firms undertaking significant volumes of conveyancing could be the most adversely affected, with SRA statistics showing that they are the most at risk of falling into the ARP '“ a lot more than firms undertaking family and mental health work, as usually assumed.

But even more hazardous for conveyancers is the proposal to exclude financial services work from compulsory insurance by removing it from the minimum terms. This would include not just high level financial services work but also all conveyancing transactions involving a mortgage.

The proposal goes to the heart of the SRA's new role as a smaller regulator intervening only to fix market failures, where natural market forces are unable to ensure the market regulates itself satisfactorily. So, the rationale behind the proposal is that so-called 'sophisticated' clients will expect their lawyers to be adequately covered, and that less 'educated' members of the public would, as a group, force conveyancers to continue to be insured for property transactions through their PII.

All conveyancers around the country would have to think through whether it makes sense to get cover for property transactions, whether they are a volume firm, a firm on a lender's panel or a high street conveyancer. And in theory the proposal would allow conveyancers not to carry insurance at all.

One problem, acknowledged by the SRA, is where to draw the dividing line between the sophisticated clients and the others, and this is a point which will be critical in the consultation.

Lenders are also unlikely to respond favourably to a proposal that could see the conveyancing market broken up into two types of law firms: those with and those without insurance.

Conveyancers too are worried that this could undermine the recently launched conveyancing quality scheme (CQS). The scheme intends to provide a quality mark for solicitors that meet its stringent requirements, including a criminal records check, making firms that comply more attractive to insurers.

'Lenders are behind the CQS and we are concerned that this could undermine their commitment to it,' says Jonathan Smithers, head of property at CooperBurnett, who has been championing the scheme within the Law Society.

Smithers also said it was unrealistic to expect insurers to reduce their premiums if conveyancing was not one of the risks covered.

'Most high street firms that need to do a bit of everything will need to continue to take cover for their conveyancing work,' he said. 'Quality and risk are two of the main issues the CQS intends to address, allowing firms where conveyancing is one of a range of diverse services to maintain a low-risk profile and secure lower premiums.'

He added this could pose a real risk in terms of public protection, as clients would not necessarily think to ask whether a firm carried insurance for conveyancing.

Further down the line '“ probably in October 2012 '“ the SRA also proposes to change the funding mechanism for the ARP. Collins said the preferred option at this stage is for a risk-reflected contribution, based on the polluter-pays principle where firms with a higher-risk profile would contribute more than others.

This could be through a levy, either on the profession itself, as part of the practising certificate fee or as a percentage of insurance premiums.

A separate investigation into the conveyancing market is scheduled to start next year.