The Solicitors Regulation Authority (SRA) has confirmed its decision to align with the Financial Conduct Authority (FCA) by instituting a similar framework of fee caps for law firms that manage financial services mis-selling claims. This strategic move underscores the SRA’s dedication to standardising regulations across the sector, ensuring consumer protection while preventing regulatory arbitrage.

The change comes on the heels of the SRA’s extensive consultation initiated in April of the previous year, following the board’s decision to embrace the fee banding system established by the FCA for claims management companies (CMCs) in March 2022. The SRA board recently greenlit a motion to seek endorsement from the Legal Services Board (LSB) for the enactment of these new rules.

Understanding the Fee Caps Framework

Under the proposed fee cap system, there is a tiered structure where maximum fees range from £420 for claims valued under £1,500 to a cap of £10,000 for claims over £50,000. This system aims to provide clarity and certainty for consumers, ensuring that solicitor fees for handling mis-selling claims are kept reasonable.

During the consultation phase, the SRA faced criticism from law firms who disagreed with the adoption of the FCA’s model. These firms highlighted the different standards imposed on legal service providers and the existing right of consumers to court-assessed fees. The Liverpool Law Society argued against the need for a standardized approach, referring to the Financial Guidance and Claims Act 2018.

Concerns were also raised that fee restrictions could make certain types of claims financially unfeasible for law firms, potentially limiting access to justice. Many objections centered around the claim that the evidence used to justify the cap was heavily influenced by patterns seen in PPI claims, which they argued do not represent the complexity found in other financial services claims.

The SRA’s Evidence-Based Rebuttal

The SRA maintained that most law firms specializing in financial service claims management can still operate profitably under the new fee structure. Their analysis was supported by consumer groups, banking institutions, and redress schemes. The SRA is confident that the FCA’s framework is suitable for regulated firms and found no substantial evidence to deviate from it.

However, the SRA acknowledged that there are some claims that don’t fit neatly into the proposed framework. For these cases, the SRA will consider exemptions, but they will be closely examined to prevent weakening consumer protection and regulatory arbitrage. Law firms will need to provide evidence of the uniqueness or complexity of each case. The SRA will provide additional guidance to help firms identify eligible cases.

The SRA continue to make subtle changes to not only enhance the powers they have but also further clamp down on firms and legal professionals who fail to adhere to the regulations in place. As we’ve seen in recent cases, they are clear that regulation breakers will face severe consequences. Following compliance failures, two law firms, Westgate Solicitors and Miles Hutchinson & Lithgow were hit with significant fines while another law firm Simpson Duxbury were also hit with a fine but this was because they held over £600,000 in residual client accounts. The SRA are determined to stamp out regulation failings and based on recent events and regular updates to those regulations, they are tightening their grip and its essential legal professionals are aware of any major fines and subtle regulation updates.

Moving Forward with Consumer Protection in Mind

To address concerns about inflation, the SRA plans to regularly review the fee structure, making necessary changes to ensure fairness. The fee cap system will be implemented six weeks after approval from the LSB, demonstrating the regulator’s commitment to upholding standards. These developments show the SRA’s dedication to creating a regulatory environment that balances firm sustainability and consumer protection. As the financial services landscape evolves, oversight and adaptive strategies are crucial for building trust and fairness in the industry.