Professional indemnity: 'Flexibility is the way forward'
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SRA delays PII consultation as it considers lowering compulsory minimum cover
The Solicitors Regulation Authority consultation on minimum professional indemnity insurance requirements initially slated for the spring will likely take place in the autumn to give stakeholders more time to consider all options, Solicitors Journal has learned.
The regulator’s preferred model would be to retain a compulsory minimum, but set at a lower level of possibly £500,000, with firms expected to top up as required in light of their specific business circumstances.
SRA policy director Crispin Passmore said the present set of PII requirements applied to all firms in the same way even though their sizes and the range of services they provided were ever more diverse. ‘That means these requirements impact differently on different people. Some could require a lot less than what we require.’
Any change to the PII requirements would need the approval of the Legal Services Board. Last year the super-regulator gave the nod to the SRA’s more flexible approach but said further research was required before full approval could be granted.
The follow-up survey undertaken by the SRA showed that sole practitioners and small firms paid a disproportionate amount in PII relative to their turnover: 7 per cent for sole practitioners and 5.5 per cent for two-to-four partner firms. The percentage was lowest for five-to-ten partner firms (3.2 per cent) and 11-to-25 partner firms (3.9 per cent).
Smaller firms have been increasingly concerned about the PII burden on their practice, especially in relation to run-off cover in the context of the forthcoming closure of the Solicitors Indemnity Fund in just over three years.
‘Flexibility is the way forward,’ Passmore said. ‘We’re trying to work through the options, talking to firms and insurers – who provided the data for the research – and trying to understand the sort of flexibility they would like.’
Passmore also noted that PII was a recurrent issue with a number of applications from new firms seeking authorisation from the SRA. ‘A handful of firms say they want to be SRA regulated but current PII requirements are way too much, especially where they already have significant indemnity cover from other activities, such as global accountancy firms or Financial Conduct Authority-regulated businesses. Multidisciplinary partnerships and legal tech businesses are coming to us asking for something different.’
Looking at other professions, Passmore continued, doctors aren’t required to have minimum indemnity insurance in place but only to have cover appropriate for their activity. That may be going too far for solicitors, he said, and the SRA would probably still like to set a minimum amount.
‘Most firms are already making their own assessment, but having no minimum may not be suitable. But £3m is too high, so we may end up proposing perhaps £500,000,’ he commented.
Among the options would be the possibility of capping claims, with firms publicising their level of cover and clients being able to buy top up as a percentage of the bill.
Run-off cover remains a sticking point. Currently the minimum is six years, with SIF potentially stepping in after that. There is no indication at this stage that the SRA would do away with compulsory run-off and Passmore said none of the alternatives considered so far were entirely satisfactory.
‘The Law Society could, for instance, set up a mutual fund to cover the period after run-off has expired,’ he said, ‘but then there would be issues about access or selection; firms that could get a good deals on the open market wouldn’t be interested in going into the mutual.’ If this analysis is correct, only firms with a higher risk profile would seek to obtain cover through this kind of mutual, potentially reviving the spectre of the now-defunct assigned risks pool.
Most of the difficulties in this regard are encountered by firms with a substantial conveyancing practice. On average, run-off cover is calculated as three times a firm’s annual premium. This often rises to five or six times where conveyancing is involved. For them, one possibility would be to have a specific premium applicable only to their conveyancing practice.
‘Because of the complexity of these issues we’ll now not consult until after the summer,’ Passmore said, ‘but whatever happens, change is inevitable.’
Jean-Yves Gilg is editor in chief at Solicitors Journal