Joint V Law Societies show grave concern about PSYROC proposal and are urging the SRA to reverse their decision.

The Solicitors Regulation Authority's (SRA) latest consultation about post six-year run-off cover (PSYROC) - Consumer protection for post six-year negligence - is due to close on 3 January 2023. Essentially, having already decided to deal with PSYROC in-house, the SRA are now seeking input on the draft rules and arrangements intended to implement the new scheme. This article explores why the Joint V Law Societies (Birmingham, Bristol, Leeds, Liverpool and Manchester) have grave concerns about what is proposed and why they are urging the SRA to reverse their decision.

The background

By way of recap, the Solicitors Indemnity Fund (SIF), managed by SIFL Ltd, currently indemnifies solicitors and their staff, once their mandatory six-year run-off cover, provided by their last insurer, has expired. The scheme is governed by the SRA Indemnity Rules 2012.

Driven by concerns that SIF was running out of money, in November 2021, the SRA launched the first in a series of consultation papers about the future of PSYROC, which was followed by a more targeted consultation in early 2022. From the outset, the SRA nailed its colours to the mast, stating that its preferred option was to exclude PSYROC from its future regulatory arrangements.

The SRA encountered significant pushback from the Law Society, the legal profession, retired solicitors and consumer groups, who argued that consumer protection in this area should not be removed. In August 2022, the SRA published a discussion paper, saying that it, "...wished to explore the options for proportionate consumer protection...", having expressed concern that the current cost of providing PSYROC is "..higher than it should be". At that stage, the options on the table included retaining the SIF with changes to operating costs and setting up a new SRA consumer protection arrangement, such as a compensation fund.

The current consultation

Upon launching the current consultation paper, the SRA presented their latest proposal as a done deal. The wording clearly assumes the transfer of arrangements for PSYROC to the SRA and respondents are simply being asked to comment on the wording and detail of the scheme. It is understood by the Joint V that the SRA Board actually made the decision to bring the post six-year arrangements in-house at a meeting on 13 September 2022.

On the plus side, the SRA now accepts that the appropriate way forward is an indemnity fund rather than a discretionary compensation fund, which would have provided inadequate protection to both the profession and consumers alike. The downside is that there appear to be a number of fundamental flaws in the underlying analysis.

The proposed scheme is predicated upon savings in annual running costs of £300,000 to £400,000 and annexed to the consultation paper is a report by Willis Towers Watson (the WTW Report), which underpins the figures. The WTW Report is, in essence, a comparison between a reconfiguration of the current scheme operated by SIFL and a new indemnity fund managed within the SRA, using the claims experience from the SRA Assigned Risks Pool ("ARP") as the comparator.

However, the ARP is not a realistic comparator, given that it handled claims against firms still in existence, who were unable to obtain insurance. PSYROC claims are, by their very nature, stale, by which we mean that there is a considerable lag time between the date of the negligent act or omission and the claim being made. Papers and relevant fee-earners from the closed firm have to be tracked down, which makes the investigation of these claims complex and time-consuming.

The PSYROC claims are also often pursued by litigants in person, which means that much of the costs burden falls to SIFL.

One of the key criticisms levelled at the existing arrangement is that the costs of defending the claims are disproportionately high when compared with the claims paid figure. The imbalance is partly attributable to the reasons already identified. However, a further factor at play is the fact that a high proportion of claims are refuted - many because they are statute barred. It is always possible, if undesirable, to slash defence costs spend at the expense of proper enquiry into the claims. However, as an earlier report by WTW, published with the SRA's November 2021 consultation noted,

".....costs must be viewed in the context of value-add as there can be false economies if processes become inferior in quality because of cost-cutting which can lead to increases in claim costs for example."

In arriving at its headline-grabbing figures in respect of projected costs savings, the WTW Report suggests that the PSYROC claims could be handled by the SRA Client Protection Team. As such, no allowance is included in the WTW Report for the recruitment of a specialised team by the SRA. However, the skillset of the SRA's existing staff, in the administration of a rules-based Compensation Fund, is very different from that required to defend professional liability claims, which are either litigated or subject to the Professional Negligence Pre-Action Protocol.

PSYROC claims also often involve complex issues of law, particularly in relation to limitation periods and trusts. Replacing SIFL's panel of seasoned professional indemnity practitioners, with staff inexperienced in this field, could either lead to an increase in defence costs or an increase in unjustified claims payments, neither of which is desirable.

History has taught us that insurers such as Alpha, Balva and Elite, who entered the market without experience of solicitors' professional indemnity risks, fared badly and became insolvent. In order to ensure consumer protection going forward, any scheme to replace SIFL needs to be fit for purpose.

On 2 December 2022, the Joint V wrote to the SRA expressing concern at the decision made by the SRA Board, to bring the PSYROC arrangements in-house within the SRA. In addition to outlining the concerns mentioned above, the letter identified the following issues in the SRA's decision-making process, which, say the Joint V, "..may result in additional and avoidable costs being passed on to the profession" :

  • Consideration of the handling of residual liabilities within SIF, including pre-2000 firm closures and existing notified claims, was excluded from the WTW Report and there is no indication of the potential scale of these
  • The WTW Report, replete as it is with warnings that it is based on limited data in a compressed timeframe, cannot provide the evidential basis for a decision which may have substantial financial consequences for the profession
  • Either no or inadequate consideration appears to have been given to investigating the alternative of achieving costs savings within SIFL
  • The transfer from SIFL to the SRA was raised in neither the November 2021 consultation nor the discussion paper dated 3 August 2022.

The Joint V's letter also expressed deep concern that the SRA failed to consult on the options that it considered at its Board meeting on 13 September 2022. In seeking reversal of the decision, the Joint V opine that it is not compliant with section 28 of the Legal Services Act 2007, which requires that the SRA acts in a way which is "...transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed". Fearing that the SRA, "....may have made a hasty decision that could be regretted both by consumers and the profession alike.."¸ the Joint V have called upon the SRA to obtain more detailed information and costings on the proposed transfer from SIFL to the SRA, as well as the alternative proposal of a reconfigured SIFL to operate at a lower expense level.

Concerns about the wording of the proposed scheme

In addition to the concerns identified above, we also have some reservations about the wording of the proposed scheme if it does go ahead. A detailed analysis of those points is beyond the scope of this article but the key concerns are:

  • The anticipated notification process for claims, at clauses 6.1(b), 6.1(c)(ii) and 6.5(a) of the draft new rules, is too rigid, including a retrospective requirement for the use of a prescribed form, which cannot be right.
  • Clause 13.1 essentially provides that, if a dispute arises between the SRA and the person seeking indemnity and they cannot agree on an arbitrator, the SRA will make the decision anyway.
  • Clause 16 of the new rules provides, in essence, that the fund shall be continued and administered by the SRA for as long as the SRA considers necessary. As with the existing arrangement, our view is that the decision should remain within the remit of the Law Society.

What can firms and individual practitioners do?

In order to lend support to the approach adopted by the Joint V, individuals and firms may also wish to submit their own responses to the consultation. In doing so, practitioners may wish to go beyond the narrow remit of the questions that have been posed and support the Joint V Law Societies in calling for the SRA to reverse its decision.

Key takeaway

There is a real risk that, if the SRA Board's decision is allowed to stand, the costs of the proposed, SRA-run scheme will escalate in years to come. Earlier in the consultation process, the need for PSYROC was argued convincingly and established. However, if overall claims costs spiral beyond the predictions in the heavily-caveated WTW Report, the sustainability of cover will once again come under scrutiny.

The Joint V have raised compelling arguments as to why the SRA's decision ought to be reversed. Now, it is over to you to lend your support...........

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.