Watchdog suggests merging all financial protection schemes

The legal profession should continue to bear the cost of financial protection arrangements but professional indemnity insurance and compensation funds should be joined into a single scheme, the Consumer Panel has said.

The  alternative option that clients would self-insure against their lawyers’ negligence was "firmly" rejected.

The recommended scheme would work by setting minimum terms and conditions for all lawyers' indemnity insurance and allowing premiums to be based on the type of legal work rather than professional title, said the panel in a report published today.

Panel chair Elisabeth Davies said: “The current system covers most of the risks consumers face, but there’s still room for improvement - such as closing gaps in coverage, greater transparency and making the schemes easier for consumers to find and use.”

Reducing the need for lawyers to hold client’s money - such as escrow schemes, which could reduce risk for consumers - was also encouraged by the panel but deemed not suitable in the current circumstances.

However the panel rejected any suggestion that consumers should purchase insurance themselves. This would unfairly transfer risk to consumers, the report said, and would be counterproductive as clients would reject firms who didn’t self-insure, while some consumers may run risks by not taking out insurance.

It is the lawyer who is the source of risk, said the report, and they should seek insurance. Vulnerable consumers will not realise that mandatory protections are not in place, or will choose lawyers who do not self-insure to keep costs low.

A single umbrella could have a number of advantages, including a single access point for consumers, lower costs for lawyers, risk-based pricing unaffected by professional title and a single point for data collection and analysis.

In April, the SRA backed plans to move the cost of interventions to the Compensation Fund. At that time £2.2m had already been spent on interventions this year. Last month, in a consultation paper on the cost of interventions, the SRA warned of an increased risk of misuse of client money. This they said was largely due to growing pressures and the continuing recession.

Protection could be delivered at a lower cost, said Davies, if the different regimes were to unite under a single scheme.

“The status quo is expensive for lawyers and consumers ultimately pay the price.

“The government has signalled it wants to simplify the regulatory system - this is an obvious candidate and could be a win-win for consumers and lawyers,” said Davies.

The report was published in response to the Legal Services Board’s request for advice on the consumer compensation system, which steps in after instances of fraud, negligent work and firms becoming insolvent.

While the panel found that existing financial protection regimes cover the key risks consumers face, it has highlighted a series of concerns and issues that the regulators need to address, including:

·         scenarios where consumers could lose out due to gaps in coverage, e.g. insurers aggregating claims which then exceed caps on maximum payouts;

·         compensation fund payouts are discretionary, but decision-making criteria are not published;

·         lack of information about the performance of compensation funds;

·         a need for better information sharing between regulators and institutions such insurers and banks, including resolving data protection issues; and

·         little research with consumers about experience of accessing the schemes.