Regulating is a losing game

You may, or may not, have noticed that the Solicitors Regulation Authority has begun what it calls ‘a reform programme’.

The first set of changes stemming from this programme were announced by the SRA board at its meeting on 2 July, the most significant of which was to cut the minimum level
of professional indemnity insurance (PII) cover required from £2m to £500,000.

Unless the Legal Services Board objects, the new scheme will be in the SRA handbook by October. The question is, what is the SRA trying to achieve and why the rush?

The reform programme
was launched in May of this year when the SRA published a policy statement and no fewer than four consultation papers. They were on indemnity insurance, the compensation fund, multidisciplinary practices and accounting requirements.

The regulator says that it wants to remove unnecessary regulatory barriers and burdens, as well as enable increased competition. At its July meeting, as well as the changes to PII,
the SRA board agreed to raise the upper limit that can be withdrawn from residual
client balances to be donated
to charity to £500.

The board also varied the eligibility criteria for the compensation fund, deciding to only consider applications from individuals and small businesses, charities and trustees where the turnover, income or value does not exceed £2m.

Interestingly, the decisions
on consultations relating to multidisciplinary practices and reporting accountants were postponed to future meetings.

Short turnaround

The SRA, not for the first time, chose to allow only six weeks for responses to the consultations, rather than the more normal 12. Presumably, this was because if changes were to be made to the minimum level of PII this year then it had be achieved with a
six-week consultation to meet the timetable.

Despite this, 142 responses, including 90 from solicitors, were received. The regulator indicated that the majority of these agreed with the reduction.

However, it subsequently emerged that 92 of the responses opposed the move, with only
34 in favour. Some prominent observers vociferously condemned the move.

The SRA board appears to have been persuaded by research which, indicated that premium costs paid by firms would reduce by an average of 5 per cent as an outcome.

Unconvinced bodies

Critics included the Law
Society, the Association
of British Insurers, some
indemnity insurers, the Council of Mortgage Lenders and the Legal Services Consumer Panel.

This rather unlikely grouping remains unconvinced that premiums will decrease and that consumers will lose the current level of protection
for no valid reason.

Linda Lee, chair of the society’s regulatory affairs board, was permitted to address the SRA board on the subject. She argued that not all firms would be able to access top-up cover at the level they required and that the society “are concerned that consumers will be confused by different levels of cover”. It seems clear that some firms will benefit from the changes and that others will not.

Given the lack of certainty on exactly what will happen, the SRA’s decision on PII seems curious. It seems to have bought heavily into the LSB agenda for greater clarity and simplicity in its rules and to be genuine in
its intention to reduce the regulatory burden on solicitors.

The SRA plainly wanted to be seen to do something that was significant and fairly immediate in its effect. There is also a hint in this decision of the regulator wanting to do something that
it perceives as populist.

The SRA’s problem is that its flagship reform has split opinions and probably made it some new enemies rather than being welcomed with open arms. There is a more fundamental divide between regulator and regulated.

If you ask solicitors what their idea of reducing the regulatory burden looks like in practice, they will talk in terms of getting rid of half the rule book and stopping the tyrannical regulator from being so unreasonable
with them.

This is why populism
is not always a good idea
for a regulator – they can
never win. In reality, they are
never going to be able to do
what is demanded of them. Extreme care is advised. SJ

Stuart Bushell is managing director of SIFA