SRA “has not justified” huge compensation fund levy rises
The Solicitors Regulation Authority (SRA) has faced criticism from the Law Society for not providing sufficient justification for significant increases in compensation fund contributions for the upcoming year. The SRA has acknowledged the disproportionate impact on smaller law firms but has not demonstrated that it considered measures to mitigate this issue, according to Chancery Lane’s response to the SRA’s consultation.
Proposed Increases
The SRA’s draft annual business plan and budget, effective from 1 November 2024, proposes a substantial hike in contributions:
For individual solicitors (usually paid by their firms): from £30 to £90
For law firms that hold client money: from £660 to £2,220
The SRA attributes this increase to “exceptional levels of intervention costs and compensation claims over the previous financial year.”
Concerns and Criticisms
The Law Society has expressed strong support for the compensation fund, which helps victims of solicitors’ fraud or default when no other recourse (such as insurance) is available. However, it has also voiced significant concerns about the proposed increase, particularly as many law firms, especially sole practitioners and small firms, are already struggling with challenging business conditions and increased costs.
The Law Society has highlighted that the information provided in the consultation paper fails to meet all but the first of the SRA’s four principles for the levy:
Maintain the fund’s viability.
Ensure contributions are manageable for the profession.
Collect contributions in a way that is manageable for those regulated.
Be transparent about the fund monies and their management.
The Law Society has urged the SRA to explain its reasoning more clearly and to outline the alternatives considered.
Suggested Alternatives
The Law Society suggested several alternatives to the proposed increase:
Spreading Costs Over Time: The SRA could spread out the costs of interventions rather than recovering them immediately from the fund. The Law Society noted that the SRA’s reserves are in credit, indicating that immediate recovery might not be necessary.
Utilising Borrowing Facility: In May, the SRA arranged a £10 million borrowing facility to manage unexpected large-scale interventions. The Law Society questioned why this facility wasn’t used proactively to reduce the levy this year.
Deferring Payments or Instalments: The society also suggested that the SRA could consider allowing firms to defer payments or pay in instalments.
Future Changes and Considerations
The SRA’s consumer protection review is already considering changes to the compensation fund, including varying contributions based on risk instead of a flat fee. While the Law Society is skeptical about the practical implementation of this idea, it agrees that the regulator should explore it further.
Another significant factor is the substantial growth in the number of solicitors over the last decade, coupled with a decline in the number of firms. This has led to smaller firms paying proportionally more in compensation fund contributions than they did 14 years ago, while larger firms pay relatively less, despite also paying more in real terms.
Law Society’s Stance
Law Society Chief Executive Ian Jeffery emphasised the need for concrete evidence to support the rationale for the increase when the SRA applies for the Legal Services Board’s approval. He acknowledged recent failures, such as the collapse of Axiom Ince, which have strained the compensation fund, underscoring the need to rebuild the fund’s reserves over time. However, he also stressed the importance of understanding what measures the SRA is implementing to minimise the risk of increasing calls on the fund.
The Law Society’s response to the SRA’s proposed compensation fund levy increases highlights significant concerns about the impact on smaller law firms and the need for clearer justification and exploration of alternatives. As the SRA moves forward with its plans, it will need to address these concerns and provide a transparent and well-supported rationale for the substantial increases in contributions.
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