The FAQs below set out the current position on key questions relating to the Solicitor’s Indemnity Fund (SIF). However, we recognise that as the planned closure of the SIF approaches, there is an increasing focus on how this will be managed and what the impact might be on the regulatory objectives set out in the Legal Services Act 2007.
As the Legal Services Board continues to monitor the situation, we will provide updates on our website, including through publishing our Board papers and minutes.
What is the Solicitor’s Indemnity Fund (SIF)?
The SIF was initially set up in 1987 to provide compulsory professional indemnity cover to all solicitors. In 1999 The Law Society decided to move to an open market Professional Indemnity Insurance (PII) system and so SIF stopped receiving premiums and stopped providing primary PII cover to solicitors.
However, using residual funds that had already been collected from previous years, The Law Society decided that SIF would continue to provide run-off cover to solicitors and firms who had been closed for more than six years (and were therefore beyond the period of mandatory run-off cover required under the new system).
It was always envisaged that the SIF would provide this additional protection for a time limited period. Premiums have not been collected for the SIF since 1999. Since at least 2006 the rules that govern the scheme have included within them a date for closure of the fund.
Responsibility for indemnification arrangements was delegated to the Solicitor’s Regulatory Authority (SRA) in 2006, at which point it took over responsibility for the operation of the SIF from The Law Society.
What is ‘Run-off Cover’?
Professional indemnity insurance policies are generally written on a ‘claims made’ basis rather than a ‘losses occurring’ basis. This means that the responsibility for paying for a claim lies with the insurer at the time the claim arises. Run-off insurance is necessary if a firm is to have cover for claims made against them after it closes, particularly where there is no successor firm.
What are the SRA’s Minimum Terms and Conditions (MTCs) in relation to run off cover?
The SRA has comprehensive MTCs for PII for the solicitors and firms that it regulates. Amongst other requirements, these stipulate that when a firm closes without a successor practice, they must purchase six years run-off cover, to cover claims made up to six years after closure.
Why is the minimum run off cover set at six years?
We understand that the requirement for a minimum of six years of run-off cover has been in place since The Law Society agreed to move to an open market PII system. It has certainly been the requirement since the SRA was established in 2006.
The SRA reviewed its PII arrangements between 2015-2018, including consulting on the issue of what length of run off cover should be required under its MTCs. Following this consultation and review, it decided to retain a requirement for six years.
The SRA’s stated position is that six years of run-off cover strikes the appropriate balance of protection for consumers, with the cost of providing that protection. Professional indemnity insurance is one of the more significant costs of regulation and increases in premiums (resulting from increasing the mandatory cover) would increase costs to providers and would be likely to be passed on to consumers. This in turn could have a negative impact on the accessibility of legal services.
In addition, the requirement to purchase six years of run-off cover is already considered to be a barrier to many firms closing, so any further increase in cost could exacerbate this issue.
What is the Legal Services Board’s (LSB) role in these matters?
A key function of the LSB is to assess applications by regulators for changes to their regulatory arrangements, including indemnification arrangements for authorised persons that they regulate.
In deciding on applications, the LSB must consider criteria including that the proposals are not prejudicial to protecting the interest of consumers and the public interest. We also must have regard to whether the proposals are proportionate, targeted, consistent, and transparent.
The LSB has considered two applications from the SRA related to the SIF. Both were to request an extension to the date for closure of the fund, that has always been set out in the scheme rules.
Why was the closure of the SIF extended?
As set out above, the SIF rules have always set a date for the fund to close, which was initially set for September 2017. In 2012, the LSB considered and approved an application from the SRA to extend closure of the SIF from September 2017 to September 2020.
This application was made on the basis that extending closure of the fund by three years was affordable and that this additional time would allow the SRA to conclude a wider review of client protection arrangements.
The SRA has since completed this review, which included consideration of the level of run off cover that should be provided through the MTCs. As set out above, it concluded that six years of mandatory run-off cover remained the appropriate level.
In September 2020, the LSB approved another application made by the SRA to extend the SIF. This time, the application was for an extension of one further year, to September 2021.
The application was made on the basis of actuarial analysis, commissioned by the SIF Board, that concluded that extending closure of the SIF by one further year was affordable. It is understood that this analysis also stated that extending by two years might be affordable but that extending it for more than this would not be affordable.
In approving the application, we noted that extending the arrangement allowed the profession and the insurance sector another year to develop a similar product. It also provided additional stability and security for consumers and retired solicitors during a time of uncertainty being caused by the COVID-19 pandemic.
Our decision noted that the SRA had not altered its general position, as set out in the MTCs, regarding the appropriate level of mandatory run-off cover.
Why is it not affordable to continue to run the SIF indefinitely?
Since 1999, the SIF has been operated from a finite pot of residual funds that were collected prior to 1999. Premiums have not been collected since then. It was always envisaged as a time limited fund that would provide protection only as long as sufficient funds remained available to continue to do so.
The SIF Board and the SRA Board have taken actuarial advice on what is affordable in terms of continuing to operate the SIF. It is understood that this actuarial analysis concluded that running the fund beyond 2022 would not be affordable, taking into account the requirements to maintain significant capital reserves and the ongoing administration and management costs associated with running the fund.
What will happen when the SIF closes?
As set out above, the SRA has reviewed its requirements for mandatory run-off cover under the MTCs and believes that six years is the appropriate balance.
The SRA Indemnity Rules 2012 set out conditions for how any funds that are released once the SIF is closed should be used.
The SRA and The Law Society are working together to consider what solutions are available following the closure of SIF.