The Board of the Solicitors Regulation Authority (SRA) has approved a series of changes to its regulatory requirements to make them more proportionate and targeted and so reduce the cost and burden of regulation.
These changes form part of a reform programme, launched on 7 May with the publication of a policy statement which sets out the Board’s approach to regulation and its reform.
The reform programme will:
- remove unnecessary regulatory barriers and restrictions to enable increased competition, innovation and growth to serve the consumers of legal services better,
- reduce unnecessary regulatory burdens and cost on regulated firms,
- ensure that regulation is properly targeted and proportionate for all solicitors and regulated businesses, particularly small businesses
The SRA published four consultation papers at the same time containing proposals forming the first stage of the reforms. At its meeting the Board considered the outcome of three of those consultations, and one earlier consultation, including consultation responses, the outcome of further engagement with stakeholders during the consultation period and analyses of the impacts of the proposed changes.
Charles Plant, SRA Chair of the Board, said: “All legal services regulators face a challenge to remove unnecessary and or disproportionate regulatory burdens on firms in the legal sector and promote innovation, competition and growth in the market. Our reform programme aims to make the SRA’s regulation more proportionate and better targeted, while maintaining critical protections for consumers.
“The majority of responses to our consultations agreed with our aim of reducing the burden of regulation. However, some stakeholders disagreed with the proposals we made.
“We have taken this feedback on board and, where we feel respondents have a valid point, we have either decided to take a fresh look at the proposals, or look for more information.”
The changes made by the Board are still subject to Legal Services Board approval. If agreed to, the changes will be made in time for the 11th version of the Handbook, which is due to go live in October.
The changes made by the Board are:
- Minimum terms and conditions for indemnity insurance: the Board is introducing a requirement on all firms to ensure they have an appropriate level of indemnity insurance cover, but reducing the mandatory minimum level of compulsory cover to £500,000. These proposals will ensure consumers are better protected by, for the first time, requiring firms to ensure appropriate cover rather than simply relying on meeting the minimum requirements and, at the same time, ensure the very many firms undertaking primarily low value transactions are not forced to obtain higher levels of insurance than they and their clients require. The Board emphasised the importance of firms being appropriately insured, particularly where work was being undertaken for vulnerable clients in high value cases; such as clinical negligence cases. The SRA would be taking targeted supervision work forward following the implementation of these changes focussed on such areas of practice. The other proposed changes to the indemnity insurance arrangements have been deferred until 2015 to allow for the completion of a wider review of indemnity insurance arrangements;
- Residual balances: the Board is increasing the amount that may be withdrawn from residual client balances and donated to charity without SRA approval from £50 to £500. Guidance on residual balances has been prepared to accompany this change and will be published on the SRA website in due course;
- Reporting Accountant Requirements: the Board decided to defer a decision on this proposal until its next meeting. The Board recognised the need to ensure that, where firms choose to hold client money, appropriate safeguards are in place to assure the safety of that money. Further analysis of the consultation responses and consideration of options will be undertaken before the Board reaches its decision;
- Compensation Fund eligibility: the Board decided to change the eligibility criteria to only consider applications from individuals and small businesses, charities and trustees where turnover, annual income and trust value do not exceed £2 million respectively.
Decisions on the licensing of multi-disciplinary practices and stopping the Keeping of the Roll enquiry as an annual event, which were also consulted on in the spring, will be considered by the Board in the autumn. The SRA Board also agreed on the 2014/15 practising fees and Compensation Fund contributions subject to the decision of the Law Society Council on 9 July on the total amount of funding required by the Law Society Group.
Minimum terms
The Board is introducing for the first time a requirement for firms to assess and purchase an appropriate level of indemnity insurance cover and reducing the minimum level of compulsory cover to £500,000. Together the SRA Board believes these changes will enhance consumer protection and reduce unnecessary regulatory burdens and costs on small firms undertaking low value transactions. The former change will ensure that firms have a positive duty to purchase cover at a level appropriate to the nature of their business, clients and transaction value rather than simply relying on the minimum level specified, even where that level might have been too low. At the same time, the many small firms undertaking low value transactions for consumers will have the freedom to not purchase cover at an unnecessarily high level. Other proposals from the consultation have been deferred until 2015 to allow further consideration. The SRA remains concerned that the level of insurance premiums drives costs for firms in ways that make it more difficult for them to compete and increases the cost of services to consumers. These proposals aim to bring these costs down. The SRA remains confident that there is still merit in the further proposals and there was support for them in the consultation, but believes that they will benefit from further consideration alongside other possible reforms that have been suggested by stakeholders. During this time the SRA will also consider these further proposals put forward through the consultation exercise. There may be a wider review of all client protection matters, including compensation arrangements and the Accounts Rules. A call for evidence will be launched this month and a further consultation paper will be produced by the end of the year. Any changes will then be announced in April to ensure they are considered in the renewal period starting in October 2015.
Residual balances
Solicitors can donate residual balances in the client account to charity if all attempts have been made to contact the owners. For amounts of more than £50, solicitors must seek permission from the SRA. The Law Society suggested that, as part of the SRA’s Red Tape Initiative to remove unnecessary administrative tasks, this limit be increased. Solicitors could then redistribute residual balances more quickly and without creating work for themselves and the SRA. The majority of respondents agreed with the proposal, with a small number objecting to the size of the new limit. Two new rule suggestions from the Law Society will be dealt with later.
Accountants’ reports
The Board has deferred a decision on this proposal until its next meeting to allow for further analysis of the consultation and consideration of the options.
Compensation Fund eligibility
The SRA will change the eligibility criteria to focus the fund on consumers and small businesses and exclude larger corporate consumers. The Compensation Fund protects clients from dishonesty or a failure to account for their money by a solicitor. However, a large number of claims come from companies such as lenders and mortgage providers. Few of these claims are successful, as the applicant will often have other avenues of redress and is unable to satisfy the SRA that it has suffered loss and hardship. By changing the eligibility criteria, the SRA will be able to manage claims more effectively and reduce the cost of administering the Fund. The eligibility criteria for the Compensation Fund is therefore limited to individuals, small enterprises with an annual turnover of no more than £2 million, charities with an annual income of no more than £2 million and trustees of trusts with a net asset value of less than £2 million.
