Consultation Response: Professional Indemnity Insurance

Transcription

1 Consultation Response: Professional Indemnity Insurance Legal Ombudsman June 2014

2 1 Introduction 1. The Solicitors Regulatory Authority issued this consultation paper on Professional Indemnity Insurance with the proposal to reduce the minimum compulsory indemnity insurance cover as part of its initiative to introduce proportionate regulation. 2. We believe there should be a minimum level of Professional Indemnity Insurance cover, but it should provide an adequate level of consumer protection. However, we do not believe the right balance has been achieved in the existing proposals. We would also suggest the Solicitors Regulatory Authority consider consumer awareness of the implications of the proposals, and the potential situations where conflict of interest and abuse may occur. 3. We believe that Professional Indemnity Insurance is only one aspect of consumer protection. When deciding whether the proposals are proportionate, it is important to consider the whole design. An example is whether recourse to the Compensation Fund is available where the consumer is not protected by Professional Indemnity Insurance. It is difficult for the Legal Ombudsman to give an opinion without understanding how everything works together. Do you agree with reducing the compulsory cover to 500,000? 4. We believe there should be a minimum level of compulsory cover, but consider that the amount of cover should vary depending on the size, nature and value of the work undertaken by a particular firm. 5. The level of insurance should reflect the level of risk a consumer may be exposed to in any particular situation resulting from the use of legal service, and it is relevant to take into account worst case scenarios when setting this amount. 6. In some types of legal services, conveyancing being one example, the value of a transaction could exceed the value of 500,000 and even if this is considered the worst case scenario situation, the risk is real and

3 2 consequences severe, so the consumer should be protected by appropriate regulatory arrangements. 7. The notion that a firm can conduct a self-assessment when deciding whether to increase the level of Professional Indemnity Insurance would be acceptable if the minimum level of Professional Indemnity Insurance provides sufficient protection for consumers. Ideally, the assessment would be conducted or audited by an independent and qualified assessor. If the Solicitors Regulatory Authority prescribed detailed rules on how each firm could calculate the appropriate level of Professional Indemnity Insurance and audit the amount, then this could bring higher levels of consumer protection. In this calculation, we would encourage detailed considerations based on the size, nature and value of work undertaken by a firm. 8. We believe that consumers expect regulated legal services to provide higher standards of service, consumer protection and access to redress through rigorous regulatory arrangements, and this to be an important concern to them when choosing their legal purchase. This gives the consumer confidence they are getting value for money. The proposal to reduce the value of compulsory cover to 500,000 has important implications if it would put consumers in a situation where they are unable to obtain an appropriate level or protection. This would undermine the perceived advantages of using a regulated legal service and may affect consumer confidence in the sector. 9. We would encourage the Solicitors Regulatory Authority to consider the potential for abuse of the self-assessment rule. There would be a conflict of interest situation where a firm in financial difficulty has the option and discretion to cut costs by reducing Professional Indemnity Insurance cover, and this would risk causing consumer detriment. 10. We disagree with the proposal to reduce compulsory cover to 500,000 because the amount of risk consumers are exposed to is considered disproportionate in particular situations. It is difficult to provide an opinion on Professional Indemnity Insurance in isolation without also considering the Compensation Fund, which should be available for all other situations where the former is unavailable for consumer redress.

4 3 Do you agree with introducing a cap on insurers liability? 11. We understand that having a limit on the liability of insurers could reduce insurance premiums for regulated legal service providers. However, that limit should be proportionate to consumer protection, and take into account the size, nature and value of the work undertaken by a firm. 12. Also, the insurance policy taken out by a firm should provide cover for all second tier enforcement action for consumer redress (see below). Do you think any such cap should be 1,500,000, 5,000,000 or another figure? 13. We would consider 5,000,000 to be more appropriate out of the two options, but this should be higher or lower depending on the size, nature and value of the work undertaken by a particular firm. Do you agree that the introduction of a cap should be balanced by reducing the opportunity for claims to be added together to treat them as one claim? 14. We would be happy to respond further on this point if further information was made available on proposals for any specific limitations in relation to the above.

5 4 Do you agree with limiting the compulsory cover requirements to individuals, small enterprises, charities and trusts? 15. In the consultation, the Solicitors Regulatory Authority mentioned mirroring the Legal Ombudsman scheme rules. 16. The Legal Ombudsman and Solicitors Regulatory Authority have very different statutory missions, so what is appropriate for one may not necessarily be appropriate for the other. The categories of complainants were established by Parliament through statutory provisions rather than something adopted by choice, as the consultation appears to suggest. 17. If the Solicitors Regulatory Authority is interested in mirroring the Legal Ombudsman categories, then it should be noted that beneficiaries of a trust has been omitted from the proposal and should be included. Such persons are usually in a vulnerable position and require protection. Whereas, a large corporate organisation will have the ability to protect their own interests with separate insurance and other means when there is a problem with their legal purchase. 18. As the Legal Ombudsman was established to provide redress, the Solicitors Regulatory Authority should ensure that the categories are sufficient for their statutory purpose. Do you agree with reducing the run-off cover to 3 years? 19. We consider reducing the run-off cover to 3 years to be disproportionate, in particular for some types of services such as conveyancing, where the consumer may not become aware of the problem for a number of years.

6 5 20. A firm may close down for a number of reasons, and one reason, which is of particular concern, is where there was a genuine problem with the service being provided by that firm. Reducing the run-off period to 3 years may hinder the ability of the consumer to obtain redress. 21. In paragraph 28 of the consultation, the Assigned Risk Pool identified that a significant 40% of consumers do not make a claim within the first three years. We consider the proposal disproportionate to potentially deprive 40% of consumers of their right to redress. Do you agree with the proposed changes to Code of Conduct Outcome? 22. We consider the proposal proportionate provided that the level of cover provides consumers with an appropriate standard of protection. 23. The consumer should know the amount of cover they are getting with their legal purchase so that they can make an informed choice. We would suggest making it an obligation for firms to explain this to consumers. Do you have any views about our assessment of the impact of these changes? 24. We would prefer to give an opinion based on more evidence and statistical information. 25. There appears to be an assumption that consumers would be happy to trade quality of service and consumer protection for a lower price: we do not believe this will always be the case.

7 6 26. As this point is central to the proposals, we would encourage the Solicitors Regulatory Authority to conduct research on this point, and decide on the evidence whether this is actually what consumers want and are willing to do. Are there any impacts, available data or evidence that we should consider in finalising our impact assessment? 27. The implications of the proposal cannot be viewed in isolation from the Compensation Fund, which together with professional indemnity insurance form the entirety of consumer redress. It would also be helpful to understand the consultation with the current iteration of the Assigned Risk Pool and future plans relating to this. 28. We would be interested in and encourage research on the consumer perspective on the proposals. 29. If a consumer had a choice to pay more for a legal service offering greater consumer protection when something went wrong with that service, or just to pay less for a legal service and accept the associated risk, which would they choose? Also, do they understand the implications? If the majority would choose greater consumer protection, then regulated legal services are competitive and there is no need to change the rules, as consumers want and are willing to pay for rigorous regulatory standards. 30. We would encourage the Solicitors Regulatory Authority to consider this proposal with the Compensation Fund consultation to ensure that consumers are fully protected and can obtain redress. Otherwise, there is a risk of undermining regulated legal services, where the advantage is the security, protection and access to redress.

8 7 Are there any other aspects of the minimum terms and conditions for PII that you think we should review? 31. The Legal Ombudsman has been made aware by consumers of some resistance from the insurance market in making payments through restrictive interpretation and has required some direct contact for example on excess charges applying. 32. Consumers must be compensated where the firm was found to have provided a poor service. Otherwise this would undermine the principle of redress and consumer protection. We have found that insurers are arguing that certain ombudsman determinations are, for example, fee reductions and not covered by Professional Indemnity Insurance because of an exclusion clause in the insurance policy. 33. We would therefore encourage the Solicitors Regulatory Authority to review and address insurance issues that affect consumer redress including fees which can form a large part of redress.