The Compensation Fund – the jewel in the crown of the profession?

by Jayne Willetts, Solicitor Advocate, Jayne Willetts & Co Solicitors; Chair, Consultation Committee

The SRA has recently published consultation proposals to restrict eligibility to the Compensation Fund and, thereby, reduce the financial burden on the profession. The paper’s title “Protecting users of legal services – prioritising payments from the SRA Compensation Fund” attempts to suggest that there is an altruistic motive behind the proposals but the real problem is cost. Claims by investors in large scale dubious investment schemes are blamed for making a significant dent in reserves resulting in contributions from firms increasing to an all time high of £1680 per firm in 2018/2019. Some of the latest proposals were contained in a 2018 consultation and are now being reworked.

Whilst many would assume that the Fund only compensates those who have suffered loss as a result of a solicitor’s dishonesty, in fact, it does much more. It makes grants where hardship is suffered as result of a solicitor’s failure to account. It steps in where a firm is not insured as well as funding intervention costs. The Fund accepts applications from all those who have dealings with solicitors but only those with client accounts are required to make contributions.

History of the Fund

The Fund has been a key consumer protection since it was first established by Section 2 of the Solicitors Act 1941 coming into effect on 16 November 1942 during World War 2. The contribution to the Fund was set at £5 per annum for each practising solicitor. Many of the practising solicitors were away serving in the armed forces. The National Archives record that Mr J.L.E Smith-Wood was refused exemption from payment of his contribution to the Fund even though he was on active service in the Army.

The Fund was regarded at the time as a crucial measure to restore public confidence in the profession which the Law Society President (Mr Randle Holme) said was at a very low level. There were only 13,000 practising solicitors in 1942. Many were lost in the war or were in prisoner of war camps. Female solicitors holding practising certificates numbered 164 in 1942.

The 1942 Rules for the Fund continued until 1966 when they were replaced by the 1966 Rules which are almost identical to the current rules. The 1966 Rules were designed to compensate a “loser” now known as an applicant. The Fund was described as a discretionary fund of last resort, there being no legal entitlement (as now) to a grant. The 1974 Guide to Professional Conduct however does record that so far all admitted claims (i.e. since 1942) had been paid in full.

SRA’s proposed changes

To return to the present day, the SRA will exclude grants to applicants to cover litigation costs incurred as an alternative means of redress before making an application to the Fund. Also excluded will be legal costs or indeed any professional costs incurred by applicants in connection with applying to the Fund on the basis that the SRA remains of the view that professional help is not needed. Claims in certain circumstances where firms have no insurance are also to be excluded.

The maximum payments are to be reduced from £2m to £500,000. The SRA seeks to justify this reduction by making comparisons with other schemes (e.g. Institute of Chartered Accountants probate scheme) and finds that ours is much more generous. Some of these regulators are very new on the scene and have very few members so these comparisons are not terribly convincing.

Applications from barristers and third party experts for unpaid fees are to be excluded. These applications are more commonplace than may be thought. Barristers and medical agencies provide credit to law firms in personal injury “no win no fee” cases for long periods. If a firm fails to account for disbursements once the case is settled and the costs are paid into client account then barristers and third party experts can apply to the Fund. A change to the funding of personal injury cases may be an inevitable consequence.

And in an acknowledgment of the problem caused by the large scale dubious investment schemes, claims are to be excluded where the conduct and behaviour of the applicant warrants refusal or reduction. In other words, where the applicant’s actions have contributed to the the loss. There will also be a specific requirement for full and frank disclosure by the applicant.

There are a myriad of other changes proposed such as applying a cap of £5m to multiple applications but space does not permit further analysis. However, the most fundamental proposal is that any claims on the Fund should be restricted to clients. Broadly, the current position is that any person who entrusts funds to a solicitor can claim from the Fund if those monies are misappropriated. This present wide category of potential applicants raises an important point for the reputation of the profession. We have traditionally been known as the profession which can be “trusted to the ends of the earth” .The Fund has played a key role in the public perception of our profession. If you deal with a solicitor in whatever capacity, your money will be safe. If this restriction is imposed then you will only be covered by the Fund if you are a client.

Consequences of the proposals

If these SRA proposals are adopted then a buyer who has lost money because of the dishonesty of the seller’s solicitor in a conveyancing transaction would be excluded.
Another example are third parties in personal injury claims such as vehicle hire companies where the solicitor has not paid their costs out of the client’s damages because they have been lost or stolen. And finally, an opposing party in divorce proceedings would be a loser in every sense of the word where the other solicitor is holding money and then steals the money set aside for a financial settlement.

Whilst managing cost is a sensible objective, the Fund has always been a key consumer protection, head and shoulders above other schemes. Lessening eligibility could reduce trust and confidence in the profession. We have always been able to say with absolute confidence to a member of the public that if you deal with a solicitor then your money is safe and secure. If anything goes wrong, the Compensation Fund will step into the breach as a safety net. That will no longer be the case if all of the proposals are adopted. One can just imagine the damaging headlines – “Mrs Smith loses life savings because of dishonest solicitor & profession refuses to compensate”.

We have always had a Roll-Royce scheme compared to other professions but it appears that this will no longer be the case. Whilst we retain the title of solicitor and are still known as a profession, do we need a fully functioning and all-encompassing Fund to maintain public confidence? What can be done to protect the reputation of the profession? These are far-reaching proposals for the profession and well worth a read.


The SRA paper is on the SRA website for Open consultations and the consultation is open until 21 April. The Birmingham Law Society Consultation Committee will be submitting a response – please submit any comments to its Chair Jayne Willetts