Insurance Post

An unfair advantage?

The incoming Legal Services Bill will make it easier for clients to recover financial loss from their solicitors. While investigating complaints will cost the consumer very little, solicitors could be faced with large bills. Mike Willis examines the impact of this new area of risk for professional indemnity insurers

For consumers with a bone to pick with their solicitor, the only recourse for recoveries of financial loss has traditionally been the courts. When the Legal Services Bill takes effect and a new national Office for Legal Complaints replaces the current variety of professional complaints handling bodies, there will be a much clearer system for lower-value loss claims to be processed without need for formal litigation.

For the moment, consumers have to rely on the existing infrastructures - most prominently the Legal Complaints Service. As successor to the Consumer Complaints Service of the Law Society - but with well-publicised ambitions and assertive independence - the LCS has been adapting its somewhat ill-fitting legal credentials to hone itself into what the OLC is intended to be: a consumer-driven dispute resolution service, drawing little difference between complaints for inadequate professional service and claims for negligence, thus offering a cheaper and credible alternative to the courts.

In all likelihood this will lead to many claimants turning to the LCS, free of cost, with a subsequent rise in the number of claims, and the creation of a new area of risk for professional indemnity insurers.

Financial Ombudsman Service model

As made clear in published government material following the Clementi Report, the model is the Financial Ombudsman Service. Formed six years ago, the FOS is designed to quickly and informally resolve disputes up to £100,000 between consumers and financial services firms.

Under licence of its statutory foundation, traditional common law stringencies are all surrendered, to a greater or lesser degree, with the consumer holding the tactical and political whip. Failing a result after initial investigations by a non-lawyer caseworker, either party can insist on referral to an Ombudsman, who is legally qualified. But their decision is not binding until the complainant confirms, in writing, that they accept it. This uneven right is the consumer's primary tactical advantage, along with their minimal costs outlay against an adviser's potentially substantial expense for investigating and responding to often spurious complaints.

The courts will not normally interfere with the Ombudsman's broad statutory discretion to "determine the complaint by reference to what is, in his opinion, fair and reasonable in all the circumstances". In IFG Financial Services v FOS (2005), a Judicial Review court upheld an Ombudsman's decision to disregard legal principles - that would have been fatal to a civil claim - on the basis it was within his statutory powers to do so and, on the facts of the matter, not irrational.

While this example fits the quick-fix purpose, only cases applicable to that aim are admitted to its process and there are clear rules against admission of unduly complex or high value claims, or by claimant businesses turning over more than £1m.

Cause for concern

For lawyers raised on the strategies of tightly regulated adversarial process, this is a new game. For member firms, the risk and claims avoidance criteria have evolved a long way in just a few years. Some are concerned that the FOS model is insufficiently rigorous - but that is not to say the system does not work. An interesting angle in the IFG story is that the decision to run the JR challenge was entirely the insurer's and its chief executive went on record to say he did not take undue exception to the Ombudsman's approach. Rough justice though it may be, it has produced many advantages.

The evolving LCS process is not dissimilar to the FOS. Complainants are required to exhaust firms' internal procedures before making a formal complaint to the LCS within a six-month timeframe, whereupon a caseworker conducts what is normally an exclusively paper exercise of investigation and preliminary recommendations. Failing agreement or conciliation, the case is referred to a senior adjudicator who can make a financial award of 'compensation' up to a current limit. This limit was raised in January 2006 from £5000 to £15,000, and is expected to rise again to £30,000 within a few months. If still dissatisfied, complainants can refer to the Legal Services Ombudsman, who has the power to make recommendations, or directions if necessary, to the LCS to revisit the matter.

The full remit of the service still appears somewhat confused, even within the LCS itself, pending fresh codification of its powers in the new Act. The LCS chief executive was quoted in June this year as confirming that negligence matters are "currently outside the scope and powers of the LCS", but that position was effectively contradicted in a letter published the following week by the LSO, which confirmed that negligence allegations are matters within the service's statutory remit under the Courts and Legal Services Act 1990. As yet, a compensatory award has no binding legal force, so transgressors have to be referred to the Solicitors Disciplinary Tribunal.


One of the consequences coming from the uplift of the compensatory limit is that insurers can be expected to take a more active interest in the process. For solicitors, the Indemnity Insurance Rules (Minimum Terms) make cover against inadequate professional service awards by "regulatory authority" compulsory.

Solicitors can be expected to press their insurers more than their financial services brethren to fund and run defences. It is harder to envisage lawyers tolerating patterns of quick-fix justice to the same extent. Technical legal issues frequently arise, especially causation or attribution of blame - and the LCS has no power, as yet, to disregard them. These are inconvenient impediments where the political imperative is rapid reparation of injured consumers for their damaged expectations.

- Mike Willis is a partner in the professional risks group at national commercial law firm Beachcroft.

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