The future of six-year wind-up coverage (PSYROC) for businesses – and the Solicitors Indemnity Fund (SIF) – is a controversial issue, but certainly not straightforward.
This is one of the reasons why we, members of the SRA Board of Directors, have discussed this issue six times since the start of 2020. We have also engaged extensively with stakeholders, notably through the dedicated virtual reference group that we have set up. Those we have spoken to include consumer groups, lawyers, local bar and representative groups, the insurance industry, government, and other regulators.
Everyone agrees that we need a quick decision and clarity on the next steps, but to date there has been no consensus on the best solution.
First a bit of background: we set the minimum professional liability insurance requirements that regulated law firms in England and Wales must purchase on the open market and that participating insurers must provide. This includes the requirement for businesses that close without a successor practice to purchase coverage for negligence claims made within six years of closing, known as liquidation coverage. The company’s last insurer must provide this level of extinction coverage, even if the company does not pay the premium.
Historical analysis shows that around 90% of liquidation claims are filed within six years (which is also the usual limitation period within which malpractice claims must be brought to court).
This coverage was originally provided by SIF, a mutual fund financed by the profession. But in 2000, the Bar made the decision to put SIF into liquidation and switch to the free market alternative above.
BIS initially covered claims made during the period a firm was covered by BIS and claims made after August 31, 2000 by law firms that had closed without a successor firm before that date. The Law Society has also decided to use the SIF surplus to fund six-year wind-up coverage for firms that ceased on or after September 1, 2000 without a successor year, after their standard six-year wind-up coverage has expired.
Since our inception in 2006, our arrangements have included the provision of SIF, managed by a separate company, SIF Ltd. We have agreed three times to expand the supply of PSYROC through SIF, amid concerns about its additional funding. The last extension was until 2022 and was supposed to allow more time to consider longer-term options.
These more recent discussions have raised a larger question of principle for the SRA: Should our regulatory provisions include PSYROC? So now we lay out some options in a consultation on the future of PSYROC and SIF itself. All of us on the board want to hear what the profession, consumers, insurers and others are thinking so that we can make the right decisions.
Before I get to the options, I want to stress that we really need to make decisions soon. No one has contributed to SIF for a long time and on the basis of actuarial advice SIF Limited has advised us that a further extension is not prudent, given SIF Limited’s solvency policy and without any additional funding.
I should also clarify that we operate within the context of regulatory objectives. In particular, we work for the public good and are required by law to act outside our remit or for the purpose of supporting or protecting members of the profession. It is our duty to balance our various objectives to create a regulatory system that provides the best possible results in the public interest and an appropriate level of consumer protection, but this does not guarantee the absence of risk to consumers. . The consultation gives more details on all this.
Our consultation explores a range of options, including stopping providing PSYROC, continuing PSYROC through SIF with new funding arrangements in place, arranging coverage through another vehicle (possibly in a more targeted form), or going through free market insurance.
There are difficult questions to answer. Where would the additional funding come from and what would that mean for consumers? Would a focus on, say, surrender or wills be an option? And if SIF no longer supplies PSYROC, what will happen to the residual funds?
The document invites views on these and other considerations, explaining that due to the evidence now available to us, our preferred option is not to continue the ongoing supply of PSYROC. In particular, forecasts show that for the 10 years from 2023, the number of consumers likely to benefit each year would be around 31, with the average value of claims paid, including defense costs, at 34. Â£ 600. The profession’s ongoing funding requirement is estimated at Â£ 2.4million per year and can, of course, be passed on to consumers. In view of all this, provision costs, compared to the volume and value of complaints, are unlikely to be a proportionate or effective means of ensuring consumer protection.
You will of course have your own perspective, so now is the time to have your say, we especially welcome any additional evidence that we have not yet identified. Our consultation runs until February 15 and we will be hosting webinars, roundtables, surveys and ongoing meetings, including with our virtual reference group, before making decisions in February.
I look forward to hearing your views.
Anna Bradley, is Chairman of the Board of the Solicitors Regulation Authority
You can respond to the consultation here.