PII under the LSA

By Edward Coulson, Partner, Davies Arnold Cooper

On 6 October 2010 the new legal ombudsman scheme (the Office for Legal Complaints, established by the Legal Services Act) goes live, with a new regime for handling complaints by individual clients in the UK. It will be consumer oriented and, like the financial ombudsman, will not be bound by strict legal principles or rules of evidence. Its jurisdiction is currently limited to the award of compensation up to £30,000 (along with remission of fees), but it is rumoured it will increased to £100,000, like the financial ombudsman.

The new scheme will affect firms with a private client base, their professional indemnity insurers and their insurers’ panel solicitors. At present, most claims are dealt with through the familiar processes of the pre-litigation protocol and civil litigation. However, the tactics which have evolved to deal with this process will not suit what is intended to be a rapid, summary and informal process lacking the costs sanctions which now shape much of the tactics of civil litigation.

It is not clear how insurers will deal with this. They will want to retain control of these claims, but it will be expensive to do so using their current claims handling arrangements and panel solicitors – a factor which will otherwise percolate through into their premiums. This may lead to a shake-up of insurers’ claims handling arrangements for smaller firms (and some not-so-small firms) with significant exposure to private clients.

Regulatory challenges

The OLC should not be viewed in isolation: it forms part of the implementation of a new regulatory regime under the Legal Services Act and, along with that, the SRA’s introduction of outcomes-focused regulation (accompanied by a new rulebook and code of conduct).

The new code adds four new mandatory principles to the existing six:

1.      compliance with legal and regulatory obligations and cooperation with regulators in an open and timely manner;

2.      running the practice “effectively and in accordance with proper governance and sound financial and risk management principles”;

3.      promotion of equality and diversity; and

4.      protection of client money and assets.

The structure of the new draft code of conduct does not make compliance easy. The old code contained prescriptive rules relating, for example, to retainer letters (rule 2). However, the new code substitutes a chapter dealing with a firm’s relationship with the client. This is couched in terms of principles, a list of outcomes and a list of indicative behaviours. This makes drafting a retainer letter quite complex, although the intention is to avoid over-rigid prescription and to encourage careful thought about it.

This will become important when dealing with claims under professional indemnity insurance policies. First, a failure to comply with the new regulatory requirements will put the law firm in difficulties, at the very least, when it comes to defending claims.

Second, claims by individual (effectively private) clients will be dealt with on new precedent-free principles. The OLC (and possibly the civil courts) will be astute in detecting failure to comply with the requirements of the new regulatory regime and to draw adverse inferences against firms in breach.

Law firms will need to give careful consideration to this wave of regulatory activity and implement the measures needed to comply with it. Failure to do so is likely to lead to a deterioration in the firm’s claims history – which, against the background of a volatile insurance market, is to be avoided.

Those contemplating conversion to alternative business structures (ABS) next year will need to give careful consideration to the structure of their professional indemnity cover. In broad terms, ABS firms will need to secure cover in accordance with the SRA’s minimum terms for their reserved activities, but will also need cover for their non-legal work. It is unlikely the market will be prepared to cover the non-legal work on the generous basis of the minimum terms. In effect, these firms will be looking at a new type of hybrid insurance covering legal and non-legal activities.

Finally, the SRA is undertaking a ‘fundamental review’ of the legal profession’s indemnity insurance arrangements. This is timely, as stresses are becoming apparent in various areas – particularly the assigned risk pool arrangements – although solutions are far from clear. It is to be hoped that renewed regulatory vigour will lead to the early disappearance of incompetent and dishonest firms which have, to date, been subsidised by the competent and honest.