UK: SRA Consults On Proposal To Abolish Solicitors’ Compulsory Insurance For Work Carried Out For Financial Institutions

Last Updated: 7 April 2011
Article by Louise Woods and Adrian Giles

As part of its plans to overhaul the present system for solicitors' indemnity insurance, the Solicitors Regulation Authority (the "SRA") has consulted on several proposals, the most controversial of which is to abolish solicitors' mandatory professional indemnity insurance ("PII") when acting for financial institutions. The consultation, entitled "Future Client Financial Protection Arrangements", closed on 28 February 2011 and the SRA is currently considering the responses.

Current System

Solicitors' PII cover is mandatory. Under the current system, PII cover can only be offered by Qualifying Insurers who have signed the Qualifying Insurers Agreement, which provides for minimum terms and conditions ("MTCs") of insurance which have been approved by the SRA. These MTCs contain provisions which are designed to protect clients and ensure that insurers are not able to avoid cover based on the non-payment of premiums.

Solicitors who are unable to obtain insurance on the open-market are covered by the SRA Assigned Risks Pool ("ARP"). Claims brought against firms in the ARP are funded by Qualifying Insurers in the proportion of their market share of premiums received for solicitors' PII cover.

The current system has come under considerable strain in recent years, in large part due to the significant increase in the number of claims brought by lenders against conveyancing solicitors as a result of the financial crisis. Previously, the ARP insured approximately 50 to 70 firms. In 2009-2010 this figure rose to 320 firms. The value of claims brought against the ARP has increased from around £5 million per year to roughly £40 million in 2008- 2009. In addition, since 2001, a significant proportion of ARP premiums are unpaid every year.

Background to the Consultation

The purpose of the consultation was to consult on proposals for change to the current PII system from October 2011 and October 2012 onwards.

The proposals came as a result of an independent review of the current client financial protection arrangements carried out in September 2010 by Charles River Associates. This review was prompted by several issues with the current PII system, such as:-

  • concerns about the increasing cost of insurance for solicitors;
  • concerns that the very rigid MTCs to which all solicitors' PII policies are subject actually increase the risk to the public rather than decrease it;
  • increasing difficulties faced by solicitors' firms in obtaining PII in the open market and therefore being covered by the SRA ARP; and
  • a general increase in the number and value of claims being brought, causing concern to insurers providing PII, upon which the legal profession depends to maintain the current open-market arrangement.

CRA were instructed to conduct their review, not only on the basis of the current difficulties in the market, but with a view to identifying improvements which would benefit the PII system in the long term.


The SRA made four proposals for implementation with effect from 1 October 2011. They are:-

Proposal 1: to remove the single renewal date for firms' compulsory PII cover. Solicitors' firms would be free to renew their policies at any time during the year.

Proposal 2: to remove financial institutions from the compulsory MTCs.

Proposal 3: to increase controls over the ARP by reducing the time during which a firm is eligible to be in the ARP from the current twelve months to six months and ensuring firms put in place strategies to either return to the open insurance market or close down.

Proposal 4: to clarify insurers' obligations to provide information to the SRA regarding firms which fail to pay their insurance premiums or those that insurers believe have provided false or misleading information.

Proposal 2 is likely to be the most controversial. Firms and their insurers would be free to arrange cover for this type of work but this would be a commercial decision for them. The SRA's justification for this proposal is that financial institutions do not need protection and it should not regulate to protect for clients who do not need such protection.

Financial institutions are defined as "any undertaking or unincorporated association which carries on a business of lending money (which may include mortgage lending) or otherwise providing or issuing credit including, without limitation, any bank or building society".

It is important to note that this exclusion would apply in respect of all work undertaken by solicitors for financial institutions, not just in respect of conveyancing work.

What could this mean for financial institutions?

The SRA expects that the main impact of proposal 2 will occur in relation to conveyancing transactions, where financial institutions often act as mortgage lenders. The proposal is only going to affect work carried out after 1 October 2011. Any claims brought for work carried out prior to this date would still be covered.

If this proposal is implemented, it is expected that financial institutions would only include on their panels firms which have appropriate cover, thereby causing a reduction in the number of panel firms. It is also anticipated that this proposal may result in financial institutions requiring separate representation from borrowers in conveyancing transactions.

Another potential problem for financial institutions could result from the claims-made basis on which PII operates. If a firm which had financial institution cover when the work was carried out, no longer has that cover when a claim is brought, financial institutions could find themselves without recourse to a policy of insurance.

The SRA is currently considering the responses it has received. Solicitors and financial institutions alike will have to wait to find out whether the proposals will be implemented.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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