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SRA Handbook

SRA Compensation Fund Rules 2011

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SRA Compensation Fund Rules 2011

Rules dated 17 June 2011 made by the Solicitors Regulation Authority Board, subject to the coming into force of relevant provisions of an Order made under section 69 of the Legal Services Act 2007, S.I. 2011 No. 1716, under sections 36, 36A, 79 and 80 of the Solicitors Act 1974, section 9 of the Administration of Justice Act 1985, section 83(5)(e) of, and paragraph 19 of Schedule 11 to, the Legal Services Act 2007, and the aforementioned Order, with the approval of the Legal Services Board under paragraph 19 of Schedule 4 to the Legal Services Act 2007.

Part 1: General

Rule 1: Interpretation

1.1

The SRA Handbook Glossary 2012 shall apply and, unless the context otherwise requires:

(a): all italicised terms shall be defined; and
(b): terms shall be interpreted,

in accordance with the Glossary.

Part 2: The Fund

Rule 2: Maintenance of and contributions to the Fund

2.1

The Society shall establish and maintain the fund called the Solicitors' Compensation Fund ("the Fund") for making grants in respect of compensation claims.

2.2

The Society may hold monies raised for the purposes of the Fund in a single fund, and may distribute any monies, pursuant to the provisions of the SA, LSA and these rules, out of such fund.

2.3

Every solicitor, REL, RFL, recognised body and licensed body shall make contributions to the Fund in such amounts, at such times and in such circumstances, as may be prescribed from time to time by the SRA. Any unpaid contributions may be recovered as a debt due to the Society.

2.4

Rule 2.3 shall not apply to a solicitor, REL or RFL who is a Crown Prosecutor.

2.5

The Society may invest any money which forms part of the Fund in any investments in which trustees may invest under the general power of investment in section 3 of the Trustee Act 2000 (as restricted by sections 4 and 5 of that Act).

2.6

The Society may insure with authorised insurers, in relation to the Fund, for such purposes and on such terms as it considers appropriate.

2.7

The Society may

(a): borrow for the purposes of the Fund;
(b): charge investments which form part of the Fund as security for borrowing by the Society for the purposes of the Fund.

2.8

The Fund may be applied by the SRA for the following purposes (in addition to the making of grants in respect of compensation claims):

(a): payment of premiums on insurance policies effected under rule 2.6;
(b): repayment of money borrowed by the Society for the purposes of the Fund and payment of interest on any money so borrowed under rule 2.7;
(c): payment of any other costs, charges or expenses incurred by the Society in establishing, maintaining, protecting, administering or applying the Fund;
(d): payment of any costs, charges or expenses incurred by the SRA in exercising its powers under Part 2 of Schedule 1 to the SA or Schedule 14 to the LSA (intervention powers);
(e): payment of any costs or damages incurred by the Society, the SRA, their employees or agents as a result of proceedings against any or either of them for any act or omission of its or theirs in good faith and in the exercise or purported exercise of such powers.

Part 3: Grants and applications

Rule 3: Grants which may be made from the Fund

3.1

The primary object of the Fund is to replace money which a defaulting practitioner or a defaulting practitioner's employee or manager has misappropriated or otherwise failed to account for. The applicant need not necessarily be or have been the defaulting practitioner's client.

3.2

It is also an object of the Fund to provide compensation in respect of the civil liability of a defaulting practitioner or a defaulting practitioner's employee or manager who in accordance with the SRA Indemnity Insurance Rules should have had, but did not have, in place a policy of qualifying insurance against which a claim could be made in respect of such civil liability.

3.3

A grant out of the Fund is made wholly at the discretion of the SRA. No person has a right to a grant enforceable at law.

3.4

For any grant to be made out of the Fund, an applicant must satisfy the SRA that the applicant is eligible in accordance with rule 3.7, 3.8, 3.9 or 3.10 and (save in respect of a grant made under rule 5) that:

(a): he has suffered or is likely to suffer loss in consequence of the dishonesty of a defaulting practitioner or the employee or manager or owner of a defaulting practitioner; or
(b): he has suffered or is likely to suffer loss and hardship in consequence of a failure to account for money which has come into the hands of a defaulting practitioner or the employee or manager or owner of a defaulting practitioner, which may include the failure by a defaulting practitioner to complete work for which he was paid;

in the course of an activity of a kind which is part of the usual business of a defaulting practitioner and, in the case of a defaulting licensed body, the act or default arose in the course of performance of a regulated activity.

3.5

For the purposes of rule 3.4(b):

(a): an individual whose dealings with the defaulting practitioner have been in a personal capacity and who has suffered or is likely to suffer loss due to a failure to account shall be deemed to have suffered hardship; and
(b): a body corporate, or an individual whose dealings with the defaulting practitioner have been in a business capacity and who has suffered or is likely to suffer loss due to a failure to account must provide evidence to satisfy the SRA that it, he or she (the body or individual) has suffered or is likely to suffer hardship.

3.6

A grant may, at the sole discretion of the SRA, be made as an interim measure.

3.7

A person is eligible under this rule to apply for a grant out of the Fund where the person:

(a): is an individual; or
(b): at the time the application is made, is a sole trader, partnership, body corporate, unincorporated association or mutual association with an annual turnover of less than £2 million;

and does not fall within rule 3.8, 3.9(a) or 3.10(a).

3.8

A person is eligible under this rule to apply for a grant in the circumstances set out in rule 3.4(a) if at the time the application is made the person falls within one or more of the following categories:

(a): a charity with annual income net of tax in the most recent financial year of less than £2 million; or
(b): a trustee of a trust with an asset value of less than £2 million.

3.9

A person is eligible under this rule to apply for a grant in the circumstances set out in rule 3.4(b) if the person:

(a)

at the time the application is made falls within one or more of the following categories:

(i): a charity with annual income net of tax in the most recent financial year of less than £2 million; or
(ii): a trustee of a trust with an asset value of less than £2 million;

and

(b)

has satisfied the SRA that its beneficiaries have suffered, or are likely to suffer, hardship if a grant is not made.

3.10

A person is eligible under this rule to apply for a grant in the circumstances set out in rule 3.4(a) or (b) if the person:

(a)

at the time the application is made falls within one or more of the following categories:

(i): a charity with annual income net of tax in the most recent financial year of £2 million or more; or
(ii): a trustee of a trust with an asset value of £2 million or more;

and

(b)

has satisfied the SRA that its beneficiaries have suffered, or are likely to suffer, hardship if a grant is not made.

3.11

Having regard to the discretionary nature of the Fund, the SRA may take into account such evidence as it sees fit when determining eligibility under rules 3.7 to 3.10 and may make a broad estimate of any relevant amount.

3.12

The SRA may summarily determine whether a person is eligible to apply for a grant.

Rule 4: Grants in respect of persons in default of regulatory requirements

4.1: A grant may be made in respect of a defaulting solicitor even if the defaulting solicitor had no practising certificate in force at the date of the relevant act or default, provided that the SRA is reasonably satisfied that the applicant was unaware of the absence of a valid practising certificate.
4.2: A grant may be made in respect of a defaulting REL even if, at the date of the relevant act or default, the registration of that lawyer in the SRA's register of European lawyers had expired or been revoked under the SRA Practising Regulations, provided that the SRA is reasonably satisfied that the applicant was unaware of the expiry or revocation.
4.3: A grant may be made in respect of a defaulting recognised body even if the recognition of that body was suspended or was revoked under the SRA Recognised Bodies Regulations or the SRA Authorisation Rules (as the case may be) on or before the date of the relevant act or default, provided that the SRA is reasonably satisfied that the applicant was unaware of such suspension or revocation.
4.4: A grant may be made in respect of a defaulting licensed body even if the licence issued to that body under the SRA Authorisation Rules has been suspended or revoked on or before the date of the relevant act or default, provided that the SRA is reasonably satisfied that the applicant was unaware of the suspension or revocation.
4.5: A grant may be made in respect of a defaulting RFL even if, at the date of the relevant act or default, the registration of that lawyer in the register of foreign lawyers had expired or been revoked under the SRA Practising Regulations, provided that the SRA is reasonably satisfied that the applicant was unaware of the expiry or revocation.

Rule 5: Grants in respect of uninsured defaulting practitioners

5.1

A grant may be made to provide compensation for loss suffered as a result of the civil liability of a defaulting practitioner or a defaulting practitioner's employee or manager who in accordance with the SRA Indemnity Insurance Rules should have had, but did not have, in place a policy of qualifying insurance against which a claim could be made in respect of such civil liability.

5.2

Where an application for a grant is made under rule 5.1 a grant will only be made in circumstances where:

(a): the defaulting practitioner should have had, but did not have, in place a policy of qualifying insurance against which a claim could be made in respect of the civil liability of the defaulting practitioner or the defaulting practitioner's employee or manager;
(b): the liability of the defaulting practitioner or the defaulting practitioner's employee or manager arises from private legal practice in connection with the defaulting practitioner's practice; and
(c): the loss is not covered by the SIF.

5.3

Any grant made under this rule 5 will be made in accordance with these rules and otherwise will be assessed and determined in accordance with the terms, conditions and exclusions of the MTC as though the defaulting practitioner had a policy of qualifying insurance against which a claim in respect of the loss had been made.

5.4

Rules 4, 6, 7, 8.1, 9, 10.3, 14, 15.3 and 20 shall not apply to any grant made under this rule 5.

Rule 6: Grants to practitioners

6.1

A grant may be made to a defaulting practitioner who or which has suffered or is likely to suffer loss by reason of his, her or its liability to any client in consequence of some act or default of:

(a): in the case of a defaulting solicitor, defaulting REL or defaulting RFL, any of his or her employees or any fellow manager;
(b): in the case of a defaulting recognised body, any of its managers or employees or any fellow manager;
(c): in the case of a defaulting licensed body, any of its managers or employees or any fellow manager, provided that such act or default arose in the course of performance of a regulated activity;

in circumstances where but for the liability of that defaulting practitioner a grant might have been made from the Fund to some other person.

6.2

No grant shall be made under rule 6.1 unless the SRA is satisfied that no other means of making good the loss is available and that the defaulting practitioner is fit and proper to receive a grant.

6.3

A grant under rule 6.1 shall normally be made by way of a loan and shall be repayable by the recipient at the time and upon such terms as shall be specified by the SRA.

6.4

In the case of a defaulting recognised body or a defaulting licensed body, such grant may be payable to one or more of the managers of the defaulting recognised body or defaulting licensed body. If a loan is made to more than one manager, they shall be jointly and severally liable for the repayment of the loan to the Society.

Rule 7: Foreign lawyers

7.1

If an REL is exempted from contributing to the Fund on the basis that he or she has completely equivalent cover under home state rules, no grant shall be made:

(a)

in respect of any act or default of the REL or his or her employee unless, in the case of an employee, the employee is:

(i): a solicitor; or
(ii): the employee of a partnership which includes at least one person who or which contributes to the Fund; or

(b)

under rule 6, to the REL.

7.2

No grant shall be made in respect of any act or default of an REL or an EEL, or the employee of an REL, where such act or default took place outside the United Kingdom, unless the SRA is satisfied that the act or default was, or was closely connected with, the act or default of a solicitor or the employee of a solicitor, or that the act or default was closely connected with the REL's practice in the United Kingdom.

7.3

No grant shall be made in respect of the act or default of an RFL, or of the employee of an RFL, where such act or default took place outside England and Wales, unless the SRA is satisfied that the act or default was, or was closely connected with, the act or default of a solicitor or the employee of a solicitor, or that the act or default was closely connected with practice in England and Wales.

Rule 8: Losses outside the remit of the Fund

8.1

For the avoidance of doubt, a grant will not be made in respect of the following:

(a)

Losses arising solely by reason of professional negligence by a defaulting practitioner, or the employee or manager of a defaulting practitioner.

(b)

Losses which are the personal debts of a defaulting practitioner and where the facts would not otherwise give rise to a claim on the Fund.

(c)

The loss results from, but does not form part of, any misappropriation of, or failure to account for, money or money's worth.

(d)

The loss results from the trading debts or liabilities of the defaulting practitioner.

(e)

The loss amounts to a claim for contractually agreed interest between the applicant and the defaulting practitioner.

(f)

The SRA was not notified of the applicant's loss in accordance with rule 11.

(g)

The loss occurred in relation to an overseas partnership which does not fall within rule 50.1(c) or 50.2(b) of the SRA Accounts Rules, unless:

(i): the loss occurred as a result of a solicitor's dishonesty;
(ii): the loss occurred as a result of failure to account by a solicitor acting as a named trustee; or
(iii): the loss was incurred in relation to the practice of an REL in an office in England and Wales of an Exempt European Practice.

(h)

The application is by the Legal Aid Agency for loss occasioned through making regular payments under the Agency's contracting schemes for civil and/or criminal work.

(i)

In the case of a defaulting licensed body, losses incurred other than in the course of performance of a regulated activity.

8.2

For the avoidance of doubt, a grant will not be made under rule 5 in respect of the following:

(a): Where there is a policy or policies of qualifying insurance against which a claim could be or has been made in respect of the civil liability of the defaulting practitioner or the defaulting practitioner's employee or manager.
(b): Any losses that would not be covered under the terms, conditions and exclusions of the MTC had the loss been subject to a claim under a policy of qualifying insurance.

Rule 9: Undertakings

9.1

A grant in respect of a failure by a defaulting practitioner to comply with an undertaking will be considered if it can be shown that the undertaking was given in the course of the defaulting practitioner's usual business acting on behalf of a client, that the recipient acted reasonably in accepting the undertaking and placing reliance on the undertaking and that:

(a): the undertaking was given with dishonest intent for the purpose of procuring money or money's worth; or
(b): the undertaking, although not given with dishonest intent, is subsequently dishonestly not performed for the purpose of procuring money or money's worth.

9.2

The SRA does not consider the giving of an undertaking in circumstances which amount to the giving of a bare guarantee of the defaulting practitioner's personal liabilities, or the financial obligations and liabilities of a client or third party, to form part of the usual business of a solicitor or other legal practitioner, and in the case of a defaulting licensed body the SRA does not consider such an undertaking to be part of its regulated activities.

Rule 10: Multi-party and multi-profession issues

10.1: Where the loss has been sustained as a result of the combined activities of more than one party (e.g. a defaulting practitioner conspires with an accountant or surveyor, or is assisted by a negligent accountant or valuer), the SRA will consider the role of each contributing factor in causing the applicant's loss. The SRA will base any grant on its assessment of that portion of the loss primarily attributable to the acts of the defaulting practitioner as opposed to that portion which is primarily attributable to the acts or omissions of the other parties, or to other factors. The SRA may decide to make a grant on a pro-rata basis in accordance with its assessment of the importance of each contributing factor in the loss, or may reject an application in its entirety if it is of the opinion that the loss was primarily due to other factors rather than the defaulting practitioner's conduct.
10.2: When a solicitor, REL or RFL is practising as the manager or employee of a body authorised not by the SRA but by another approved regulator, the SRA will not consider any claim in respect of that individual's act or default, or his or her employee's act or default.
10.3: When an individual authorised not by the SRA but by another approved regulator is practising as the manager or employee of a recognised body, the SRA will in its discretion consider a claim in respect of that individual's act or default.
10.4: In the case of a defaulting licensed body, the SRA will assess the extent (if any) to which the loss is attributable to an act or default in the course of performance of a regulated activity (as opposed to an activity not regulated by the SRA or to other factors). The SRA will take that assessment into account in deciding whether to make a grant and, if so, in what amount. The SRA may refuse to make any grant in a case where it assesses that the loss was primarily attributable to an act or default in the course of performance of an activity not regulated by the SRA or to other factors.

Rule 11: Applications: form and time limit

11.1: Every application must be delivered to the SRA, in such form as may from time to time be prescribed by the SRA, within twelve months after the loss, or likelihood of loss, or failure to account, as the case may be, first came, or reasonably should have come, to the knowledge of the applicant. The SRA may extend this period if satisfied that there are circumstances which justify the extension of the time limit.

Rule 12: Documentation in support

12.1: The burden of proving a claim rests with the applicant who must provide such documentation as may be required by the SRA including when requested, a statement of truth. Failure to provide such documentation or to co-operate with the SRA will be taken into account when determining the merits of the application.

Rule 13: Exhausting other remedies

13.1

A grant may be refused or limited where the loss or part of the loss is an insured risk or where the loss is capable of being made good by some other means.

13.2

The SRA may, before deciding whether to make a grant, require the applicant:

(a): to pursue any civil remedy which may be available to the applicant in respect of the loss;
(b): to commence insolvency proceedings;
(c): to make a formal complaint to the Police in respect of any dishonesty on the part of the defaulting practitioner; or
(d): to assist in the taking of any action against the defaulting practitioner.

13.3

In respect of an application for a grant under rule 5, the SRA may, before deciding whether to make a grant, require the applicant and/or the defaulting practitioner to seek indemnity from one or more qualifying insurers under a policy or policies of qualifying insurance.

13.4

In the absolute discretion of the SRA, a grant may be made before requiring the applicant to resort to other means of recovery.

Rule 14: Notice to defaulting practitioner

14.1

The SRA shall not make a grant unless:

(a): a communication has been sent to the defaulting practitioner at his, her or its last known correspondence address or to his, her or its representative informing the defaulting practitioner of the nature and value of the application; and
(b): not less than eight days have elapsed since the date of receipt of such communication, which shall be regarded as the day following the date of the communication.

14.2

If it appears to the SRA that:

(a): any communication sent under rule 14.1 will not come to the attention of the defaulting practitioner or his, her or its representative; or
(b): a grant should be made urgently as an interim measure to protect the interests of an applicant or potential applicant to the Fund,

then the SRA may make a grant notwithstanding failure to comply with the provisions of this rule.

14.3

Where the SRA has made a grant as an interim measure in accordance with rule 14.2(b), the SRA shall as soon as practicable send the communication referred to in rule 14.1(a) and may (insofar as the failure to communicate before the making of the grant has prejudiced the defaulting practitioner) waive in whole or in part the Fund's right of recovery against the defaulting practitioner.

Rule 15: Costs

Litigation

15.1

Where an applicant intends to or has already instituted proceedings for recovery of his loss and wishes to apply for a grant in respect of the costs of the proceedings, the SRA will only consider such costs where:

(a): they can be shown to be proportionate to the loss and the amount likely to be recovered; or
(b): the proceedings were necessary for the making of an application to the Fund.

Application

15.2: Where a grant is made, the SRA may consider an application for a further grant in respect of the reasonable costs properly incurred by the applicant with either his solicitor or other professional adviser, provided that such costs were incurred wholly, necessarily and exclusively in connection with the preparation, submission and proof of the application.

Costs where the defaulting practitioner has failed to complete work

15.3: If the defaulting practitioner did not complete the work for which he was paid, a failure to account shall be deemed to have arisen within the meaning of rule 3.3(b) of these rules. In such circumstances, the SRA may consider making a grant in respect of the additional reasonable legal costs incurred by the applicant in completing the outstanding work or a grant by way of contribution towards those costs.

Rule 16: Interest

16.1: The SRA may consider an application for a supplementary grant by way of a sum in lieu of lost interest on a principal grant. Such interest will be calculated in accordance with the rates prescribed from time to time by the SRA. This will normally be calculated from the day the loss which was the subject of the principal grant was incurred, up to the next working day after payment of the principal grant. Such payment will take into account that a grant is a gift and is therefore not subject to tax.
16.2: Where the application for the principal grant is in respect of a failure to redeem a mortgage, the SRA may also make a grant in respect of the additional interest accrued to the mortgage account as a result of the defaulting practitioner's failure to redeem.

Rule 17: Maximum grant

17.1: Subject to rule 24 the maximum grant that may be made is £2million.

Rule 18: Recovery and subrogation

18.1: Where a grant is made otherwise than by way of loan or if by way of a loan repayment of the loan is waived or otherwise the borrower has failed to repay part or all of the loan, the Society shall be subrogated to the rights and remedies of the person to whom or on whose behalf the grant is made (the recipient) to the extent of the amount of the grant. In such event the recipient shall if required by the SRA whether before or after the making of a grant and upon the SRA giving to the recipient a sufficient indemnity against costs, prove in any insolvency and/or winding-up of the defaulting practitioner and sue for recovery of the loss in the name of the recipient but on behalf of the Society. The recipient shall also comply with all proper and reasonable requirements of the SRA for the purpose of giving effect to the Society's rights and shall permit the SRA to have conduct of such proceedings.

Rule 19: Reduction in grants

19.1: Where an applicant or the applicant's servant or agent has contributed to the loss as a result of his, her or its activities, omissions or behaviour whether before, during or after the event giving rise to the application, the SRA may, in the exercise of discretion and to the extent that such activity, omission or behaviour has contributed to the loss, reduce the amount of any grant that may be authorised or reject the application in its entirety.

Rule 20: Deduction from grants

20.1: The SRA may deduct from any grant the costs that would have been legally due to the defaulting practitioner so that the applicant will not be in a better position by reason of a grant than he, she or it would otherwise have been in.
20.2: The SRA may within its discretion deduct from any grant all monies already recovered by an applicant and monies which either will be or should have been recovered.

Rule 21: Refusal of an application

21.1: If the SRA refuses to make a grant of either the whole or part of the amount applied for, the applicant will be informed in writing of the reasons for the decision.
21.2: The fact that an application has been rejected does not prevent a further application being submitted provided that substantial new relevant evidence, information or submissions are produced in support of the new application.

Rule 22: Appeals

22.1: Should the applicant wish to appeal against refusal of an application, written notice of intention to appeal must be delivered to the SRA within thirty days of the date of receipt of the decision, which shall be regarded as the day following the date of the written communication of the decision. Such notice must be accompanied by details of the grounds of appeal together with any additional evidence in support.

Rule 23: Notice of requirements

23.1: Any requirement of the SRA under these rules will be communicated in writing.

Rule 24: Waivers

24.1: The SRA may waive any of the provisions of these rules except rules 14 and 21 to 25.

Part 4: Repeals and commencement provisions

Rule 25: Repeals and commencement

25.1: These rules shall come into effect on 6 October 2011, whereupon the Solicitors' Compensation Fund Rules 2009 ("the 2009 Rules") shall cease to have effect save in respect of applications submitted before that date, which shall continue to be subject to the 2009 Rules.