CILEx Regulation, the independent regulator of specialist lawyers, has submitted a report to the Legal Services Board (LSB) asking for a review of the anti-competitive repercussions that run-off insurance is having on legal entities.
Currently law firms must have six years of run-off insurance cover in the event they close down. However the same rule applies if they were to switch regulator, despite still being in business.
The report, compiled following discussions and submissions from insurers and legal businesses, demonstrates that entities looking to change regulator will be adversely affected.
Wills Jacobsen Legal Ltd, a law firm that switched regulator to CILEx Regulation, had to incur the additional costs. Clare Wills, the owner, said: “In the end we bit the bullet and made the change knowing it was the right thing for our business – but if this additional burden hadn’t been there, it would have made the switch quicker, simpler, and cheaper. 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.”
Mr Chivers stated his firm, Stilwell and Singleton Solicitors, explored transferring regulator. He said “Disappointingly we had to make the difficult decision to opt against transfer due to the financial burden of run-off, which is currently acting 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.”
John Kunzler, a senior vice president in the Financial and Professional Practice at Marsh, the insurance broker and risk adviser working with CILEx Regulation, commented: “Based on the research the requirement to take run-off appears to be 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. 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.”
The requirement also increases the risk of ‘double insurance’, where a firm takes run-off insurance but works on a continuous retainer under a new insurer. If something goes wrong the two insurers may question responsibility and dispute claims, ultimately leaving consumers and entities in a vulnerable situation.
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% more insurance premium over a six year period; in effect ruling out a switch for most firms.”
In January 2015 CILEx Regulation became a regulator of entities delivering reserved legal activities. CILEx Regulation has developed a single proposal form, meaning applicants will not have to complete multiple forms to get PII quotes from insurers, but that all insurers signed up to the QIA will accept, and quote off, a single form. CILEx Regulation supports innovation and looks at opportunities to reduce red tape.