Many parts of the press are talking about an ARP “crackdown”. Firm words from the Solicitors Regulatory Authority have been issued and many lines of text have been written, but what does this mean for conveyancers? Whilst Today’s Conveyancer welcomes the news from the SRA as it can only help conveyancers we look forward to the root and branch review of professional indemnity insurance rules coming over the next 18 months.
Everyday conveyancing relies on undertakings between solicitors to ensure that transactions can occur. When we receive undertakings from the solicitor on the other side we don’t know their track record or whether or not they have been able to obtain insurance in the open market.
When things go wrong the costs and implications to perfectly good and well run conveyancing businesses can be excessive. The failure of a solicitor on the other side to discharge an existing mortgage on a sale can result in failure to register your clients’ interest (borrower and lender), threats from organisations acting for lenders and in some cases removal from lenders panels. If you are removed from a large lender panel through no fault of your own the impact on your time and business to sort it out can be completely disproportional and damage your ability to trade.
On the 13th July 2010 there were 213 firms of solicitors in the Assigned Risk Pool.
The Assigned Risk Pool is the system that enables firms of solicitors whose track record is so poor that no insurance company is prepared to insure them to continue to trade.
Firms can stay in the ARP for up to two years and the claims against these businesses are shared between all qualifying insurance companies proportionately. So if you are a large insurance company that doesn’t want to insure smaller solicitor firms but Quinn is happy to insure small firms, even though you would never insure the risk yourself you pick up a proportion of the liability because you insure some large low risk solicitors that you have carefully vetted. All conveyancers pay for other firms with poor claims records through their premiums and the rules presently allow these firms to continue to trade.
More interestingly cover for ARP firms continues whether or not the firms are willing or able to pay the premium. Windsor Partners one of the leading professional indemnity insurance brokers has previously explained that in 2008 only 30-40% of premiums due to be paid by firms in the ARP were actually paid.
Insurance companies have been pulling out of the market due to concerns that with the departure of Quinn many more firms will enter the ARP this year. Quinn insured almost 3000 firms of solicitors and those firms face a considerable potential increase in premium if they are able to find a new insurer. If they aren’t the numbers in the ARP will grow rapidly and all qualifying insurers will find their liability risk increased.
To deal with these concerns the SRA Board has approved the following actions:
– By the end of this month (July) all firms in the ARP who are reaching the end of their two-year term will be contacted to ensure that there are robust plans in place for them to leave the ARP by October — either through obtaining market insurance or through orderly wind-down
– Also by the end of this month, all firms in the ARP who have not paid their ARP premiums will be contacted and told that they must pay promptly. Firms who fail to do so will face regulatory sanctions, and/or will face court action, and/or will be declared ineligible for any further term in the ARP and closed down.
– In August and September, regulatory action will be pursued in relation to these matters, so that by October as many firms as possible — particularly high-risk firms and those failing to pay their premiums – will have been managed out of the ARP
– In October, any firms whose position has not already been resolved will face the likelihood of intervention to close them down.
– Firms newly entering the ARP in October will be treated in the same way.
Chief Executive Antony Townsend said: “The tough enforcement strategy which the SRA Board has approved is designed to ensure that firms stay in the Assigned Risks Pool for as short a period as possible; that firms which pose a high risk are rectified or closed down; and that firms who fail to pay their premiums face credible deterrents, including prompt closure.
“Compulsory professional indemnity insurance for solicitors’ firms is an essential element of the current arrangements to protect consumers of legal services. While it is right that firms experiencing difficulty in obtaining professional indemnity insurance should be given some assistance to do so, it is wrong that firms which are financially unstable or pose a significant risk should be propped up: that poses a danger to consumers, and a burden upon the profession who pay for the Assigned Risks Pool. Neither is acceptable.”
To support this programme of action, the SRA will be increasing its capacity for forensic inspection by employing outsourced expertise. Additional funding for these purposes has been discussed with the Law Society.
These measures, coupled with the reforms to the Assigned Risks Pool which the Board made in May, will improve public protection, reduce costs to the profession, and help to sustain a healthy, affordable market for solicitors’ professional indemnity insurance.
Work on implementing this strategy will start immediately. In parallel, the SRA will discuss with groups in the profession how best to support firms in the ARP who are able and willing to try to rectify their situation.
Until the SRA completes its full ‘root and branch’ review of client financial protection, good firms of conveyancers will be paying for bad firms claims records. This review is expected to complete by 1 October 2011. The review will be wide-ranging and will include both compulsory professional indemnity arrangements and the Compensation Fund.