The Solicitors Regulation Authority (SRA) is poised to modify the financial contributions to its Compensation Fund, advocating a shift from the current equal division between solicitors and firms to a 70/30 split. This adjustment reflects the evolving landscape of the legal profession, with individual solicitor numbers rising and firm numbers diminishing.
Since the establishment of a 50/50 funding allocation in 2010, the profile of the legal profession has shifted notably. The increasing number of individual solicitors contrasted with a declining number of firms has led the SRA to reconsider the financial burden on remaining firms. The proposed 70/30 split between solicitors and firms aims to recalibrate contributions in line with these changes.
For example, sustaining the fund’s balance has typically required approximately £14.2 million annually over the past five years. Under the current 50/50 split, this would necessitate an individual solicitor’s contribution of £40, with firms contributing £1,075. The proposed adjustment to a 70/30 split would modify these contributions to £55 for individuals and £662 for firms, which would particularly benefit smaller firms and those in less profitable sectors, where many ethnic minority solicitors also practice.
The SRA’s consultation on this matter is part of a broader review encompassing consumer protection within the legal sector. There is notable support from various stakeholders for the Compensation Fund’s continued existence. The potential short-term reform is targeted at the 2025/26 practising year.
The SRA is also contemplating more extensive long-term reforms. These include tailoring contributions based on firm size or risk profile. While some suggest offering discounts to firms that meet certain standards, such as employing external auditors or securing specific accreditations, these measures could lead to increased operational costs despite reduced fund contributions. Larger firms might find it easier to meet such enhanced requirements, possibly imposing a greater financial strain on smaller firms.
Alternative approaches under consideration involve varying contributions according to risk categories, practice areas, or the amount of client money held. Although this strategy might discourage holding client money directly, opting for third-party managed accounts (TPMAs) could become more common. Firms using TPMAs do not contribute to the fund currently if they do not manage client money directly.
The consultation also explores modifying the rules surrounding fund payouts. Revising or abolishing the discretionary £5 million overall cap on related claims could provide greater clarity, especially in contexts involving speculative investments. However, the SRA retains the authority to limit payments or exclude claims based on specific circumstances, particularly where claimants share responsibility for their losses.
Individual claims against the fund are capped at £2 million, though this limit can be exceeded if deemed necessary. A notable instance was in connection with claims arising from the collapse of Axiom Ince, which prompted increased contributions from both solicitors and firms in the current year. Since July 2022, the SRA has processed compensation exceeding £100,000 in numerous cases, highlighting the fund’s critical role in safeguarding consumer interests.
The SRA’s proposed changes to the Compensation Fund’s financial structure reflect a strategic response to shifts within the legal profession. By adjusting contributions, the regulator aims to ensure equitable funding while maintaining consumer protection. The consultation seeks to balance financial sustainability with operational fairness, ensuring that the fund remains a robust safety net for all stakeholders.
