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The SRA’s decision to defer scrapping the ARP is a hammer blow to the profession, says Mark Casady
An eagerly awaited Solicitors Regulation Authority (SRA) policy statement was released on 19 April after a three-month consultation on the future of solicitors’ professional indemnity (PI) insurance.
Sadly, there was little to celebrate as the SRA’s so-called ’gifts’ were nothing more than derisory. It was hugely frustrating that the SRA behaved so diffidently considering the advice it received from Charles River Associates’ excellent and comprehensive review, which demonstrated so clearly that immediate and far-reaching change was essential.
The SRA chose not to listen to either its advisers or insurers and recognise that the Assigned Risks Pool (ARP) should close this year and that there must be a move away from the current ’one-size-fits-all’ minimum policy terms and conditions towards a more flexible approach, with policies tailored to the risks and requirements of individual firms.
The current minimum terms and conditions, imposed on the market by the regulator, allow solicitors to maintain their insurance even when they have neglected to pay premiums or are found to have lied on proposal forms. They also fail to distinguish between types of firm, so that every firm, no matter its size or practice style, must buy the same policy. It is clear to insurers that the ability to vary policy terms plays a crucial part in achieving a stable and sustainable market.
The old Master Policy and then the mutual Solicitors Indemnity Fund both failed in the face of immensely tough claims environments. The open market, confronted with the same conditions, has endured and continues to provide competitive insurance.
It would therefore be easy to say that the market has ridden out the problems and that its ability to do so is evidenced in the lack of reform to the arrangements. This, however, would be far from accurate.
The price of this achievement has been great, as witnessed by three exceptionally tough renewal seasons: vast losses in the ARP, hundreds of firms failing to get insurance and, perhaps most significant of all, no improvement in the way consumers are protected from negligent, incompetent or dishonest solicitors.
While compensation has been delivered, the overriding objective of regulation - to ensure the public does not suffer through poor professional conduct - has not.
Prevention better than cure
Throughout discussions on the future of solicitors’ PI, insurers have continued to lobby the SRA, emphasising that consumer protection is primarily about prevention and not just compensation.
The current arrangements have allowed too many inadequate firms to stay in business and commit further frauds and negligence to the detriment of their clients and to the profession’s reputation.
There are many challenges ahead for the legal profession and its insurers. UK financial indicators show clearly the likelihood of fragility and slow or low growth for the foreseeable future, impacting on fees and claims adversely.
There is likely to be increasing reluctance among insurers to provide cover to unprofitable insurance classes, given the potential for a contraction of capacity following increasing catastrophe claims and the impact of Solvency II.
The changing regulatory scene and the introduction of alternative business structures later this year could also affect the market.
The SRA’s policy statement deferring change could see hundreds of firms being jettisoned by insurers in the knowledge of the future termination of the ARP. Meanwhile, the stringent nature of the Council of Mortgage Lenders’ Handbook and the lack of adherence to it by so many of the profession continue to cause major difficulties.
The SRA’s reluctance to recognise its failings as the gatekeeper of who should and should not be allowed to practise illustrates a fundamental weakness in the regulation of the profession.
It is clear that central to the SRA’s decision to leave the termination of the ARP to 2013 is the imposition of Solvency II in early 2014. One wonders whether the correlation between the implementation of this directive and the timing of the closure of the ARP is a coincidence. In the absence of Solvency II the ARP may well have remained.
And there is another ominous signal from the regulator that an open market may not be its preferred route, as it states that “the SRA clearly understands, and indeed states that for many law firms there is effectively a choice between only two or three insurers and should this situation not improve, or in fact deteriorate further, there would be no alternative but to revert to a master policy or indemnity fund system”.
Could this be its master plan?
In the circumstances, it is worth recalling that quote from Virgil’s Aeneid: “Equo ne credite, Teucri! Quidquid id est, timeo Danaos et dona ferentis.” For those whose Latin is a little rusty: “Do not trust the horse, Trojans! Whatever it is, I fear the Danaans, even when bringing gifts.”
The Law Society and the SRA are clearly pinning their hopes on the insurance market bailing them out; but given the results of recent years it will not be surprising if once again the legal profession endures a nail-biting renewal period.
Mark Casady is the solicitors’ profession leader at QBE European Operations