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Compensation fund awards down by 40 per cent

SRA warns rise in risk could see increase in claims in the coming years

1 June 2017

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Grants made by the Compensation Fund to clients of solicitors who suffered financial losses as a result of regulatory breaches dropped by more than 40 per cent last year.

Financial statements published by the Solicitors Regulation Authority show that between November 2015 and October 2016, the SRA granted around £10.3m from the fund, down from £17.9m in the previous period.

The fund provides compensation on a discretionary basis, usually in the wake of an intervention, when solicitors or firms have misused client funds, either where they have acted dishonestly or where they have failed to account for money they were holding.

Last year, the main two reasons for compensation were replacing misappropriated inheritance and replacing stolen funds intended for house deposits, which respectively amounted to £4m and £1m overall.

Although the number of grants was ‘about the same’ as the previous year, there had been a decline in average value, according to strategic planning director Richard Collins.

Talking after the SRA’s board meeting last week, Collins also noted that while the number of interventions was generally going down, there had been a few one-off large claims.

What’s more, he said, the SRA was aware of ‘pressure building up in the market and of a general rise in risk’. He warned in particular about so-called ‘investment schemes’, an issue that caught the regulator’s attention last year.

In addition, he said, a number of interventions at the end of the year could lead to the compensation fund being liable for sizeable pay-outs.

Investment schemes also featured in separate discussions on the forthcoming anti-money laundering regulations as high-risk channels for fraud which solicitors could inadvertently get drawn into.

The Treasury department is yet to finalise how it will give effect to the regulations, with consultation due to start in late June.

SRA policy director Crispin Passmore said the new rules could lead to more onerous regulatory obligations if the government goes ahead with current plans to set up a new oversight regulator.

It could also require the SRA to undertake more inspections or visits, pushing up the regulator’s costs further.

Asked whether this would mean the SRA would continue to take a thematic approach in this regard, Passmore said it was too early to say. What was important, he said, was that solicitors should remain aware that the money laundering risk was often associated with mortgage fraud, conveyancing, and, increasingly, investment schemes.

‘Whether solicitors are negligent or unknowingly being used by fraudsters, we want to make sure they understand the risk,’ he said.

The Compensation Fund is financed partly by direct action against defaulting firms and partly by a levy on the profession. 

Current contributions are set at £32 per individual and £548 per firm which holds client money, the same as last year.

Actual collection from the profession depends on the amount the SRA believes it needs. Last year, this brought in £8.8m, compared with £9.1m in the previous year.

Action against defaulting solicitors and firms led to the recovery of £10.9m, up £3.5m from £7m in the previous period.

The overall fund value itself grew. It had £40.8m in cash and investment last year, up nearly £2m from £39.7m in the previous year. The investment income part of the fund rose £228,000 to £339,000.

The number of claims received by the fund rose from 1,174 in 2015 to 1,504 in 2016. More claims were still open at the end of the year – 399 compared with 292 in 2015 – worth a total of £42.1m (£36.8m in 2015).  

The fund closed 1,397 of those claims (2015: 1,430), with payment made in 604. The average payment per matter was £22,860.

The average claim amount open at year end was lower than in the previous year: £106,000 in 2016, and £126,000 in 2015.

Jean-Yves Gilg is editor-in-chief of Solicitors Journal

jean-yves.gilg@solicitorsjournal.co.uk | @jeanyvesgilg

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COMPENSATION FUND