SRA 'not trying to cut the numbers of small firms'

The Solicitors Regulation Authority is not abandoning smaller firms or trying to drive them out of the market, the regulator’s chief executive has said.

Talking to Solicitors Journal on the eve of OFR day, Anthony Townsend rebuffed suggestions that the SRA’s push to raise risk and compliance standards concealed a move to reduce the number of smaller practices.

Unable to absorb the additional regulatory burden imposed by outcomes-focused regulation, sole practitioners and smaller high street firms will eventually shut, the argument goes.

“Absolutely not,” said Townsend, “the objective is to make sure that all firms can manage their risks in a way that doesn’t create a problem.”

Discomfort among smaller firms crept in when changes to the assigned risks pool were unveiled earlier this summer. From 2013, firms that are unable to find professional indemnity insurance on the open market will no longer be able to find shelter in the ARP.

The ARP itself will disappear and, instead of the insurance risk being pooled, insurers will extend existing cover by a maximum of three months. One consequence is that it will no longer be possible for new firms to start off without insurance and go straight into the ARP.

“The risk to small firms arising out of the ARP is very large,” Townsend said. “The system has tolerated high-risk firms within the regulated sectors which has had a major knock-on effect on premiums for firms in the small sector.”

The issue, Townsend continued, was not simply about firms sitting in the ARP. It also affected firms outside.

“Our concern is as much about the small firms sitting outside the ARP who have seen their premiums go up or who have been refused insurance because the insurers’ perception is that there’s too much risk in the system,” he said.

“The big win for small firms from what we’ve done on the ARP is that we’ve convinced insurers that the risk is being properly managed.”

Latest SRA figures indicate that there were only 53 applications to join the ARP this year, compared with 411 at the same time last year.

“This suggests that the ARP strategy is working and that small firms are managing to get insurance on the open market. Firms that are well run should find it easier to get insurance,” Townsend said.

Townsend agreed that some firms may be closing as a result of failure to secure cover on the open market but that this was “probably preferable to being in the ARP followed by an SRA intervention”.

“There’s a limit to what we can do about that, but the combination of managing out the old ARP system – which had led to inflated premiums – coupled with a much tighter approach to the authorisation of new firms should make life easier for small firms rather than difficult.”

In a separate development, justice minister Jonathan Djanogly heralded a “landmark day for the UK legal industry”.