SRA: Profile of profession has changed since 50/50 split was set
The 50/50 split between individual solicitors and firms in their funding of the SRA Compensation Fund should be changed to 70/30, the regulator has recommended.
It is also looking for views on longer-term reforms which could see contribution levels determined by the size or risk profile of law firms.
The consultation on delivering and paying for a sustainable compensation fund is one of three published yesterday following the Solicitors Regulation Authority’s consumer protection review.
It said the review heard “widespread and strong support” for the fund from the profession, consumer groups and public.
Changing the apportionment of contributions was the short-term reform that could be put in place for the 2025/26 practising year.
This year, individuals are paying £90 and firms £2,220, huge increases on 2023/24 as a result of pressure on the fund following the collapse of Axiom Ince.
The consultation said that, since the 50/50 split was set in 2010, the number of individual solicitors has increased significantly while the number of firms has fallen, increasing the burden on those that remain.
A 70/30 split was the option that “best adjusts for the changing composition of the profession”.
For example, a requirement of £14.2m – the average that would have been required over the previous five years to maintain the fund’s balance – would mean an individual contribution of £40 and firm of £1,075 on a 50/50 split. In a 70/30 split, the figures were £55 and £662 respectively.
This would be “beneficial to smaller firms and those operating in less profitable areas of work”, which was also where a disproportionate number of ethnic minority solicitors work.
The longer-term options consulted on included a discount to firms that met certain specified criteria, such as employing external auditors or having certain accreditations, for example for cyber security.
“This could incentivise firms to take positive actions to reduce risk, better protecting both consumers from potential losses and the fund from pressures. This may go some way to addressing concerns that ‘low risk’ firms subsidise those who pose a higher risk.”
But it could also be complex to administer and result in higher operational costs for firms, even if their fund contributions were reduced, the consultation noted.
This could mean larger, wealthier firms meeting the enhanced requirements, leaving smaller ones to shoulder more of the cost of the fund.
Another alternative was to vary contributions based on risk categories, such as regulatory history and practice areas. But this too could be complex and actually increase costs, the SRA said.
Further methods for setting differential contributions were using either the amount of client money held by the firm or by using the firm’s turnover.
“This approach may disincentivise holding client money and may increase the use of alternatives such as third-party managed accounts (TPMAs) particularly amongst larger firms. Those firms which use TPMAs and do not hold client money in their accounts are currently exempt from making firm contributions to the fund.”
The consultation looked as well at possible changes to the rules for payouts from the fund, such as revising or removing the discretionary £5m overall cap the SRA can impose on claims that relate to the same or connected underlying circumstances.
This was introduced in the context of rising claims associated with investment scheme fraud but has never been used, although it was considered in relation to Axiom Ince.
The consultation also raised the possibility of explicitly excluding certain types of claims, such as those associated with speculative investments, for greater clarity.
The SRA has a discretion to refuse or limit payments of claims in certain circumstances, or in relation to particular types of applicant or loss.
“For example, we have used this discretion in the past to exclude or reduce claims associated with high-value investment schemes in circumstances where the work did not fall within the usual business of a solicitor, or the applicant had contributed to the loss.”
Individual claims on the fund are capped at £2m but can be exceeded by discretion (which has only been used once in recent years).
Since July 2022, the SRA has made 171 payments of more than £100,000, 12 of more than £500,000 and four over £1m. The average payout is around £40,000 and a typical claim around £5,000.
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