The Solicitors Regulation Authority has been dealt a blow in its bid to reduce the burden on the compensation fund, with the oversight regulator minded to reject a proposed cap on payments.

The regulator wants to reduce the maximum payment limit for individual claims from the compensation fund from £2m to £500,000, unless there are exceptional circumstances. It also wants to exclude claims from ‘large’ charities and trusts with assets or annual income of more than £2m from being eligible to access the fund.

However  Legal Services Board chief executive Matthew Hill wrote to his SRA counterpart Paul Philip last week saying that a warning notice had been served on proposed changes.

The SRA pays compensation – ultimately funded by solicitors and law firms – to clients who have suffered hardship as a result of dishonesty by their legal adviser. The regulator says that only 0.2% of payments over the past 15 years have been for more than £500,000, so its potential changes affect a comparatively tiny number of claimants. If the cap had been in place since 2010, firms would have saved £50 a year on average.

Hill said that although the LSB recognises the benefits of a cap, these do not justify the ‘significant detriment’ that would be experienced by clients.

He said the SRA needed to explain or or quantify the wider potential benefits of the cap. ‘Further, the LSB has reflected on the whether the individual cap is likely to achieve the SRA’s intended aim of preventing large fluctuations to the compensation scheme’s contribution levels, thereby reducing the regulatory burden of contributions on solicitors and firms but considers there is insufficient evidence to support this at present.’

Further evidence is also required before the LSB will support the charities exclusion, which at the moment is not deemed to provide any ‘tangible benefit’ to the compensation fund scheme.

Following the warning notice the SRA must present new evidence to prevent its application being rejected. The decision period has been extended to April 2022, although a decision is likely to be sooner than that date.