'Financially burdensome' run-off insurance hampers firms looking to switch regulators

The Legal Services Board (LSB) has been asked to launch a review on the anti-competitive effect of run-off insurance on legal entities following a report published by CILEx Regulation.

CILEx regulation's report notes that law firms are required to have six years of run-off insurance cover in the event they close down, yet the same rule applies should they switch regulator, despite still being in business.

The requirement also increases the risk of 'double insurance', whereby a firm takes run-off insurance but works on a continuous retainer under a new insurer.

This can result in the two insurers questioning responsibility in the event something goes wrong. CILEx Regulation said this could ultimately leave consumers of legal services in a vulnerable position.

The report, compiled after discussions with insurers and legal businesses, shows that entities looking to change regulator will be adversely affected.

CILEx Regulation chair, Sam Younger said: 'We have had several law firms wanting to switch from their current regulator to CILEx Regulation, but are unable to because of the prohibitive run-off costs.

'This is a rule made by the regulators, and it prevents legal businesses choosing the regulator that is right for their business model, their specialism, and their consumers.

'We asked insurers what they would charge, and although premiums for a business regulated by CILEx Regulation might be lower these firms would have to pay on average 52.5 per cent more insurance premium over a six year period; in effect ruling out a switch for most firms,' he concluded.

Wills Jacobsen Legal, a firm which has switched from the Solicitors Regulation Authority to CILEx Regulation, commented that without the additional burden, the change would have been 'quicker, simpler, and cheaper'.

The firm's owner Clare Wills remarked: 'There would also have been additional funds to market the business as a new entity. After payment of run-off these funds were not available.'

Ian Chivers, a partner at Stilwell and Singleton Solicitors, admitted that his firm had considered switching regulator but opted against the transfer due to the financial burden of run-off insurance, which 'acts as a mechanism to constrain the free movement of legal entities between regulators'.

'We would transfer regulator immediately if the unnecessary financial burdens were removed,' added Chivers.

John Kunzler, a senior vice president in the financial and professional practice at Marsh, the insurance broker and risk adviser working with CILEx Regulation, thinks the requirement to take run-off is 'a significant financial hurdle to the average firm changing regulator'.

'The research indicated that no discount off the normal run-off cost was likely to be given, even though the entity would be ongoing with a new regulator,' he said.

'Although the premium as a CILEx entity is lower, the amount of the reduction appears insufficient to make it practical to fund the cost of the change out of cash-flow, for example, from the premium reductions over approximately three years.'

'From the costings obtained it appears it would be approximately seven years before overall savings are achieved from making the change, and in the short term the run-off premium is a significant expense,' Kunzler concluded.

Matthew Rogers is an editorial assistant at Solicitors Journal matthew.rogers@solicitorsjournal.co.uk | @sportslawmatt