The Gazette 1992

GAZETTE

E N T S

S A

MARCH 1992

Compensation for Claims or Licence to Steal?

The issue of the Compensation

Fund, in financial and administrative

terms, is reaching serious

proportions. Concern has been

expressed by every solicitor and this

is reflected within the Society, as we

strive to come to grips with and

control a deepening problem.

It may be helpful to reflect on the

existing situation and explore future

options under a number of

headings.

The Law

The Solicitors Act, 1954 requires the

Society to maintain a Fund, at a

level of £25,000 (net of liabilities),

from which compensation would be

paid to persons who have suffered

loss through the dishonesty of

solicitors. The Society is obliged to

provide an indemnity, but has a

complete discretion on when this is

paid. We have an opinion from

counsel which indicates that,

should the Fund become exhausted,

the membership of the profession

and the assets of the Society are

immune from claims by

unsatisfied claimants. There is not,

in the existing law, any requirement

that we should "reinsure" the Fund

in order to provide that, on

substantial defalcation, there would

be monies available to meet a

claim.

Each solicitor, every January, pays

the same contribution to the Fund.

In this current year, 1992, it is

£475.

The Facts

In the year ended 31 December, 1990

solicitors contributed £1.39M to the

Fund.

In the same year, almost £800,000

was paid out in claims. The level of

claims has been increasing steadily

from about £240,000 in 1986 to a

point where it is now veering towards

£1M a year.

The Annual Report to November

1991, which was sent to each

solicitor, gives the full facts and

figures. The Society voluntarily

reinsures the Fund over the excess of

£1M which we ourselves carry, to a

sum of £4M, at an annual premium

of £135,000. In previous years it was

insured to a level of £6M. We had to

bring down the level to reduce costs.

Because of the fact that very large

claims have been notified in the last

two years but not yet considered, our

insurers have had to make reserves

and this has had a substantial

impact on our re-insurance premium.

The reinsurance of this Fund on 1

May, 1992 may be difficult to

negotiate, or require a much higher

excess, or be very expensive.

The overall costs of keeping this

system in place are only too well

known to solicitors and I would

detail them as follows:-

• £475 paid by each solicitor

• A huge commitment in manpower

by the Finance Department, the

Director of Finance, the

Accountant, the five Investigating

Accountants, and support staff.

• A massive volume of voluntary

work done by the Chairman and

members of the Compensation

Fund Committee (this Committee

generally sits from 12 noon until

very late evening). These talents

could be better employed to the

benefit of the Society

• Administration costs within the

Law Society come to £421,466,

including salaries, legal costs of

intervention in a practice etc.

The Options

The Solicitors (Amendment) Bill,

1991 changes the definition of the

word "person" to "client" and we

thank the Minister and the

Department for effecting this change.

The Bill requires that the Fund be

maintained, at a given time in the

year, at £1M. That is already being

achieved and can be complied

with.

The Bill contains many procedures to

strengthen the hand of the

Compensation Fund Committee, the

Investigating Accountants, and the

Court generally, in dealing with

relevant cases.

The Society has been unable to

identify any other profession which

has an "open-ended" Compensation

Fund procedure:-

• Stockbrokers have a Fund which

is limited or capped to £48,000

Stg. in each case.

• In New York, Lawyers pay in

$360 per annum, their Fund has

$2M in assets and claims

(verified) of $30M.

For many reasons we will be insisting

that Government recognise the

extreme dangers of a complete

collapse of the Fund and that they

will agree to a cap of £50,000 in the

Bill. If this is not done there is a

real danger that the Fund could be

burst and the profession virtually

bankrupt.

The Society can go on employing

more Investigating Accountants at

additional cost to the profession.

This service is useful, not merely in

detecting defalcators, but in assisting

genuine solicitors in the

establishment of correct procedures

and practices for the management of

their clients' accounts.

The Society is considering publishing

the names of solicitors against whom

claims are paid and the Bill will

make it obligatory on the Society to

publish the outcome of disciplinary

cases.

(Continued on page 52)