An unfair burden
8 May 1997
23 April 2014
22 July 2014
18 June 2014
19 August 2014
15 January 2014
Has the time come for the SIF formula to be changed? asks Trevor Murray. Trevor Murray is a sole practitioner and Law Society Council member for Southend and Thurrock.
Apart from my raising it in the council chamber on 17 July, it would appear that neither the Law Society's task force nor the Solicitors Indemnity Fund (SIF) have seriously reconsidered the formula by which the burden of the premium is distributed.
It is assumed that the formula is, and always has been, fair. But, in circumstances where the profession is faced with finding an additional £454.5m as a result of a combination of unexpected circumstances, it seems reasonable to reconsider the formula.
SIF statistics reveal that between 1989 and 1997, the gross fee income of the profession appears to have doubled. However, this is unlikely to be the experience of the high street practitioners who will bear the heaviest burden of the supplementary levy.
Because the Law Society is going to allow a maximum discount on premiums of 30 per cent it means that sole practitioners earning £70,000 in gross fees will pay £7,322 straight off the top of their income - and this is only for this year's contribution without any reference to the recovery of the shortfall. That is an enormous penalty to inflict on somebody perhaps just starting up in business with a clean claims record.
At the other end of the scale, practices earning more than £150m in gross fees will "suffer" a levy from the SIF of only 0.62 per cent on their "top slice". While their contributions are very substantial, they are hardly likely to equate to 10.46 per cent of their gross income as is the case of sole practitioners with an impeccable record.
There are cogent arguments for maintaining the present formula on the basis that sole practitioners and firms of up to four partners, as a group, draw more out of the SIF in claims than they pay in premiums and that large firms pay more into the fund in premiums than they draw out in claims. On that basis it is argued that the formula is fair.
But is this true? Most of the time high street firms serve the public very well and they are an asset to the profession which should be preserved.
In addition, high street practitioners have not experienced a doubling in gross fee income over the past 10 years.
If anything, the bulk of the work from which their income is derived is extremely poorly rewarded, labour-intensive and has either remained stable over that period or has been seriously reduced.
They are therefore the least able to protect themselves against the occasional negligence action, because they do not have the economic or human resources to do so.
Even if small firms cannot guard against claims as well as the big firms, is this really a justification for penalising the best and claim-free high street firm along with the worst?
The complex claims loading and discount calculations under discussion can and should take care of those elements in the profession we can do without. Further, the ever-tightening margins on fees means that the additional impact of the SIF levy is an annual crippling overhead with which the small practitioner can barely cope.
Add to this a 50 per cent increase in premiums next year and the collection of the shortfall using the same formula and it is easy to predict the disappearance of high street practices.
There is an argument for spreading the burden of the SIF premium across the profession on the basis of, perhaps, a 5 per cent levy on the gross fee income of every practice. This would meet practices' obligations almost painlessly compared with the current proposal.
This is not a case of the City firms baling out the high street practices. City firms are fortunate not to have suffered the economic strictures that their colleagues in the high street have faced at the lower end of the legal spectrum.
If the profession as a whole sees any merit in its survival in its present form, where lawyers are available to meet the needs of every strata of society, then it must realise that some will do very well and be able to protect themselves against problems while others will be in the front line and be continually suffering and at greater risk.
The income tax system in this country recognises that the least well-off should pay the least and those best able to afford it should pay the most. It would be strange if the first £23,000 of a person's income was taxed at 40 per cent or more with a reducing scale on income in excess of this figure, so the Law Society Council and the SIF should reconsider the distribution of premium burden among the profession. It should apply discounts and loading more fairly, reward the innocent, punish the guilty and protect the rest in a way it plainly does not do at the moment.