Plans for reform of the professional indemnity insurance rules could ‘hand control of the conveyancing market to lenders and insurers’, solicitors have been warned.

Former Law Society president Paul Marsh, an industry specialist, said the proposals are ‘potentially a disaster’ for high street conveyancers.

The Solicitors Regulation Authority unveiled plans to exclude claims by mortgage lenders and other financial institutions from the minimum terms of PII cover in a consultation launched this week. Firms carrying out conveyancing work would instead need to negotiate additional cover with insurers.

The consultation on client financial protection also proposes scrapping the single renewal date for PII from next October, and reducing the length of time firms may stay in the assigned risks pool to six months.

The SRA paper says that, by removing financial institutions cover from the minimum terms, most of the 36% of firms that do not conduct residential conveyancing would benefit from lower premiums, while fewer firms would ‘dabble’ in conveyancing, and fewer would fall into the ARP.

SRA head of standards Richard Collins said: ‘If you have a more flexible insurance market, firms will be able to buy more appropriate cover. There’s a huge amount of intervention by us as a regulator in the operation of the insurance market, but we should only be intervening where there has been a failure in the market.’

However, conveyancing solicitors expressed concerns over the proposal to remove claims by financial institutions from the minimum PII terms.

Marsh, also a former chair of the Solicitors Indemnity Fund, which provided insurance to the profession before solicitors’ PII moved to the open market, said the move was ‘potentially a disaster’ for high street conveyancers. He added: ‘This is the latest example of the SRA’s failure to understand how the conveyancing market works, or to regulate it.’

Marsh said the problems that lenders have with conveyancers have been caused by the SRA’s failure to regulate, allowing dishonesty and other problems into the market.

‘To remove protection for lenders from the minimum terms of cover, will effectively hand control of the conveyancing market to the lenders and insurers,’ he said. ‘If you want to act for a lender, you’ll have to apply for separate cover, so the insurers will be able to choose which firms they want to cover.’

Marsh added: ‘If I were a small residential conveyancing firm, it would be very attractive to become a licensed conveyancer, as the insurance requirements will be cheaper in the short term.’

Another informed source added: ‘This is another issue that could move residential conveyancers off the high street. It will force solicitors to become licensed conveyancers.’

The Association of British Insurers welcomed the proposals on claims by mortgage lenders and the proposed limit on the time law firms can spend in the ARP. However, it said it was concerned that some issues, including the operation and funding of the ARP, would not be addressed in time for 2011.

The SRA also announced it will begin investigating failures in the conveyancing process early next year.

The Law Society said the SRA consultation has ‘some sensible proposals’, but removing work for financial institutions from the scope of the minimum terms and conditions of cover would ‘hit conveyancing solicitors hard’.

The Law Society said it was pleased that the SRA had heeded its call for an end to the single renewal date for PII, so that firms can renew cover at any time of year. It said a ‘significant number of solicitors’ had told the Society that the single renewal date placed additional pressure on insurers and brokers, which encouraged them to prioritise larger firms over smaller firms.

Chancery Lane said it also hoped the changes would mean more insurers would be encouraged to enter the PII market.

Law Society president Linda Lee said not requiring insurance coverage for commercial clients would be short-sighted. She said: ‘Conveyancing solicitors would find themselves forced to take out additional insurance – a bitter blow at this point in the economic cycle. The extra cost could be the last straw, which drives some solicitors out of business, thus reducing consumer choice.

‘The present arrangements provide comprehensive coverage for all solicitors' clients, without the need to make complex decisions about which commercial clients are too large to need protection and which are not.

‘However, we are pleased that the SRA has heeded our call to move away from the single renewal date. We are determined to ensure our members can take advantage of lower premiums, more choice in the market and a less pressurised renewal procedure that could result from this change.'