Bradley: SRA using its freedom as a company
The Solicitors Regulation Authority (SRA) has proposed a 336% hike in compensation fund contributions for law firms in the wake of the spiralling cost of law firm failures.
It has also arranged a £10m borrowing facility to ensure it has access to cash to deal with an unexpected large-scale intervention so as to “reduce the potential pressure” this could cause.
SRA chair Anna Bradley said yesterday that the regulator was not “anticipating” having to use it, however.
The SRA Compensation Fund is a discretionary fund of last resort that can pay out up to £2m where a solicitor has stolen or not accounted for client money – and it is not covered by the firm’s professional indemnity insurance – or did not have insurance in place.
Last autumn, SRA chief executive Paul Philip warned solicitors to brace for a “radical” increase in their contributions to the fund following the interventions into Axiom Ince, Metamorph and Kingly, and this has come to pass.
In a consultation on its annual business plan and budget from 1 November 2024, the SRA has proposed increasing the contribution for individual solicitors, which is usually paid by their firms, from £30 to £90 and for law firms that hold client money from £660 to £2,220.
It said the hike was the result of “exceptional levels of intervention costs and compensation claims over the previous financial year”.
The proposed individual fee is the same as it was in 2018/19, when the firm fee was £1,680. Though the number of solicitors has increased since then, the number of firms has fallen.
The regulator carried out 65 interventions during 2022/23, more than double the number in the previous year, with two in particular – Metamorph and Axiom Ince – generating “significant costs and payments to former clients of the firms”. Kingly was in 2020.
This has turned a surplus of £3.6m in 2022 to a deficit of £29m in 2023. As a result, the fund’s reserves have fallen to £25m and the SRA has decided to rebuild them over the next two to three years rather than in one go.
The SRA said it has worked to reduce the impact of the increased costs and payments on contributions “as far as possible”.
This has included “tight budgetary control of costs, detailed scenario planning and modelling of impacts, and the negotiation of a banking facility in the event of a further large intervention”. The costs of interventions are also covered by the fund.
Ms Bradley said the banking facility was an example of the SRA using its freedom as a limited company to ensure that “risks are manageable”.
She went on: “We are not anticipating needing to use it and it would only be used in particular cases.”
Mr Philip told a media briefing: “We are trying to maintain the viability of the fund. We do not know what interventions will happen next year.”
He said that a big intervention could have an impact on the cash flow of the fund and the banking facility was a way to avoid making additional calls on solicitors for funds.
“We have done all we can to make sure the contributions don’t rise anymore than they absolutely have to,” he added.
The future of the fund is part of the consumer protection review the SRA began earlier this year in the wake of rising interventions and Axiom Ince.
Mr Philip, who spoke on a Legal Futures webinar last year on the future of client account, made the point in the briefing that, if solicitors no longer held client money, they would not need a compensation fund.
The SRA is not, however, seeking more from the profession for its other costs. It is looking to raise £70.2m from practising fees for 2024/25, up 3.8% from £67.6m. This was the figure for inflation in March.
Increasing solicitor numbers mean that the SRA’s share of the individual practising certificate fee will remain unchanged at £162, although, as we reported last month, the Law Society’s increasing budget means the overall fee is likely to rise by around £4.20 from its current £307.
Ian Jeffery, chief executive of the Law Society, said the compensation fund provided “crucial protection and reassurance to consumers in contrast to the lack of protections offered by unregulated providers”.
It also reflected a “collective responsibility” to maintain public faith in the profession when individuals fell short of its values.
Meanwhile, the SRA has had to agreed to put its investigation into Axiom Ince on hold as a result of the Serious Fraud Office probe announced last November.
In his report to the last meeting of the SRA board, Mr Philip said: “We have been liaising with the SFO as it progresses its investigation. We have agreed to hold off proactively progressing our investigation – for instance through speaking to witnesses – or moving towards any enforcement action, until the SFO has completed its investigation.
“We have already sought to protect the public in the interim by either suspending the practising certificates, or restricting the practice, of key individuals. We will provide an update when we are in a position to proceed.”
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