Law firms and solicitors will pay at least three times more in compensation fund contributions next year as the Solicitors Regulation Authority seeks to plug the shortfall arising from big-ticket interventions.
The compensation fund made a loss of £29.1m in 2023, as costs mounted from interventions following the implosions of Axiom Ince and Metamorph, among others.
The SRA warned last year that solicitors would have to take a financial hit to cover such costs. The threat of a one-off levy was ruled out, but the regulator said today that annual contributions will have to rise from October 2024.
Individual contributions – usually paid for by firms – will jump from £30 to £90, while the levy on firms goes up from £660 to £2,220. This is payable by all firms who hold client money and is a flat fee regardless of size of firm.
The SRA points out that the cost to individuals will be the same as in 2018/19. The firm contribution was £1,680 that year, but the ongoing diminution in firm numbers since then has meant remaining practices have to contribute more now.
For the first time in its history, the SRA has also agreed a potential borrowing facility of £10m that would be taken out if there are any further large-scale interventions in the next year.
Minutes from this month’s board meeting, from which the public and media were as usual barred, recorded that members acknowledged the fund contribution hikes would be ‘unwelcome’. But Paul Philip, chief executive of the SRA, said today: ‘The SRA compensation fund plays a critical role in protecting the public and maintaining trust in the profession. We have a duty to ensure the fund is maintained and remains viable. This proposed rise has been driven by an unprecedented level and cost of claims and interventions in the last year. We have done all we can to make sure the contributions don’t rise anymore than they absolutely have to.’
The compensation fund recorded a surplus of £3.6m in 2022, but this relative stability was undermined last year, when the SRA intervened into consolidator Metamorph and then national firm Axiom Ince. The SRA’s actions in relation to the collapse of Axiom Ince are subject to a review by the Legal Services Board, with a report due out imminently.
The SRA says it wants to build reserves to a sustainable level over two to three years, rather than through a larger up-front call on contributions. The proposed increase in fees this year will ensure the fund is viable, while the regulator looks at a wide-ranging consumer protection review that will consider the long-term future of the fund.
The balance in the fund at the end of the financial year was £25.1m, down from £54.2m at the end of the previous year.
The SRA is also proposing that its call on the practising certificate fee for 2024/25 will remain unchanged at £162 per person. Consultation on the practising fee and compensation fund contribution runs until midday on 24 June, with a consultation on the wider business plan open until 2 July.
Ian Jeffery, chief executive of the Law Society, commented: ‘The compensation fund provides crucial protection and reassurance to consumers in contrast to the lack of protections offered by unregulated providers. Professions can only succeed if they uphold core values, such as integrity, reliability and accountability. On the rare occasions when our professional colleagues fail to uphold these values, our collective responsibility means that public faith is maintained.
‘It is unfortunate that there have been such significant failings that we now face substantial increases in the individual and firm contributions to the compensation fund. It underlines the need for greater vigilance and probity on the part of our members and a focus on effectiveness by regulators. Ultimately, we accept that the role of solicitors is to protect the interests of their clients, and that we must do that, even when the costs are high, because the costs of not doing so would inevitably be higher.’
