Industry News

LeO’s Scheme Rules – Comprehensive Cover

12 July 2012

When the Legal Ombudsman’s (LeO) office opened in October 2010, a commitment was made to review the Scheme Rules within 18 months and, accordingly, a twelve-week consultation period ran from 26th March to 18thJune 2012.

Having read many of the published responses to the consultation, as well as numerous discussions on the topic, it appears that the focal points of the debate are, predictably, consumer-focused, namely the level of compensation that can be awarded by LeO and the proposal to allow third parties to complain to LeO. However, application of the Scheme Rules carries equally significant implications for solicitors and many seem to have overlooked an inconsistency which, unless addressed, could establish dangerous precedents.

The Draft Scheme Rules propose to alter paragraph 2.10 to allow LeO to exercise discretion with regard to the classification of successor practices, with the effect that even if the respondent to a complaint is a successor practice for the purposes of the Scheme Rules, LeO may disallow the complaint if it decides that it is not ‘fair and reasonable in the circumstances of the case’.

Whilst this amendment has been justified on the basis that it minimises the risk of potential injustices, it is submitted that affording LeO such discretion is dangerous for the following reasons:

  1. The classification of a legal practice as a successor is highly complex, subject to interpretation and, whilst professional indemnity insurers invariably deliver their own verdict, it is ultimately a matter of law. The Solicitors Regulation Authority (SRA) acknowledges that it is not in a position to issue authoritative advice on the subject, nor to declare with any certainty whether a legal practice is indeed asuccessor. It follows that such wide discretion would in fact allow LeO to potentially alter the law in this area, a power which was not intended by Part 6 of the Legal Services Act 2007.
  2. The decision of a practice (‘the predator’) to merge with or acquire another (‘the target’) can hinge on the existence of run-off cover i.e. whether the predator becomes a successor practice and thereby assumes liability for claims of the target. However, the definition of successor practice in the Scheme Rules is broader in that it fails to take into account the alternative scenario, namely where the target has elected to secure run-off cover and the insurers have confirmed that the predator is not deemed a successor practice for the purposes of the SRA Indemnity Insurance Rules. The effect of this is that in circumstances where the target’s insurer has confirmed that it is not a successor practice, the run-off cover will provide the complainant with an alternative remedy: a negligence claim which, depending on the facts of the case, may be more appropriate than lodging a complaint with LeO.
  3. Whilst LeO prides itself on being a beacon for consumer protection, it is questionable whether it is in the best interests of the consumer for his or her complaint to be considered against the Scheme Rules with the loss quantified by a LeO caseworker when the option for a proper legal assessment of quantum could be arranged as part of a negligence action.

Furthermore, this inconsistency has potentially drastic consequences for the predator, who will invariably expend precious management time and also risk financial and reputational damage investigating and responding to allegations that should have been handled by the target’s insurers. Furthermore, it seems illogical and unfair that a predator could identify a target, conduct extensive due diligence, seek assurances from the insurer that it will not be regarded as a successor practice and finally complete the acquisition, only to be faced with issues that – rather than being regarded as complaints of standard of service – should be dealt with under the target’s run-off cover. Given that the categories of complaints that LeO is willing to consider extend to acts or omissions that ordinarily would form the basis for a cause of action in a negligence claim, the distinction between complaints over standard of service and negligence claims is becoming blurred, creating – for the purposes of the Scheme Rules – many more successor practicesin the process. In addition, if the proposed extension of the time limit for making complaints to six years from the event or three years from knowledge of the event is ratified, the risk that predators will be affected by this risk will be heightened.

In a legal marketplace currently pre-occupied with the possibility of an imminent explosion of M&A activity, it is asserted that a continuation of the application of the Scheme Rules will stifle entrepreneurial behavior and create significantly more injustices than those alluded to in LeO’s Draft Scheme Rules.

LBS Legal responded to the consultation and we hope that LeO will consider our comments.

Ian Braithwaite
Client Relationship Manager

T: 0845 056 3949
M: 0743 727 4046

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