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Financial protection arrangements

In October 2012 the Legal Services Board asked the Legal Services Consumer Panel for advice on 'the extent to which regulators' financial protection arrangements, including compensation, are adequate and the appropriate level of risk that consumers should be expected to bear'.

In order to answer the request the Panel carried out a literature review and interviews with experts, and mapped existing arrangements, before making recommendations for improvements. Our results are published as the report on Financial Protection Arrangements, below.

Overall the Panel found that on most occasions the financial protection arrangements will deliver redress against the key risks consumers face. However, our study uncovered a lack of accessible data which made assessment difficult, as well as a number of issues, concerns and areas for improvement. These include scenarios where consumers may lose out unfairly due to gaps in coverage, disputed territory between regulators and insurers, and issues related to the discretionary nature of schemes. In addition, the current protections can be difficult to access, fragmented and lacking in transparency.

We believe a single scheme joining up professional indemnity insurance and compensation funds across the whole legal services market should be actively explored. This could work by setting minimum terms and conditions for all lawyers' indemnity insurance and allowing premiums to be based on the type of legal work rather than professional title. Such a scheme could also deliver a single compensation fund.

The Panel also encourages regulators to continue to explore options to slim down the need for lawyers to hold client money – such as escrow schemes – which could make things less risky for consumers. But we reject any suggestion that consumers should be invited to purchase insurance themselves, instead of requiring lawyers to source cover as now. The report concludes this would unfairly transfer risk to consumers and could prove counterproductive – clients would reject firms who didn't self-insure, while some consumers may risk not taking out insurance.

At the same time we have published a think-piece on the wider issue of how risk and responsibility should be fairly shared by consumers and providers. We also commissioned a separate study on consumers' attitudes to risk and regulation in the legal services market, which was carried out by Vanilla Research, and published in February 2013.

The LSB responded to our advice on financial protection arrangements in October 2013. There was agreement with a number of our recommendations, including the need for more comprehensive data collection, publication of data, development of key performance indicators, and greater transparency about the criteria used by compensation schemes. These will be assessed as part of the LSB's consideration of future rules changes. The LSB also plans to explore with regulators whether it would be appropriate to collect standardised data on the operation of schemes.

The LSB recognised the potential advantages of a centralised arrangement for compensation, something which has also been supported by the Council of Licensed Conveyancers and the Council of Mortgage Lenders. Given this support, the Panel would now like to see the feasibility of such a scheme explored in more detail.

You can read the LSB's response here.

Key Documents

Date Title Description
27 March 2015 CLC - Compensation fund operating framework (pdf, 199kb) Response to the CLC consultation on the compensation fund operating framework
18 September 2014 SRA - Call for evidence on client protection (pdf, 82kb) Response to the SRA's call for evidence, highlighting our previous work in this area
24 July 2014 Letter to LSB (pdf, 88kb) Letter to the LSB on the SRA rule change application in respect of PII
18 June 2014 SRA - Changes to PII (pdf, 126kb) Response to SRA consultation on changes to professional indemnity insurance
18 June 2014 SRA - Changes to compensation fund eligibility criteria (pdf, 79kb) Response to SRA consultation on changes to the compensation fund eligibility criteria
23 October 2013 Panel welcomes LSB response to advice on FPAs (pdf, 70kb) Press release welcoming the LSB's response to our advice
10 June 2013 Financial Protection Arrangements (pdf, 595kb) The Panel's report on regulators' financial protection arrangements
10 June 2013 Risk and Responsibility (pdf, 337kb) A discussion of the wider issue of how risk and responsibility should be divided between consumers and providers
07 February 2013 Risk and the Role of Regulation (pdf, 371kb) Vanilla Research's report into consumers' views on the division of risk and responsibility between consumers and providers in the legal services market
08 October 2012 LSB Commissioning letter (pdf, 649kb) Letter from the LSB formally requesting the Panel's advice