Principles and risk-based regulation - Role of PII in risk management

Learning Outcomes

After reading this article, you will be able to explain the concept of risk-based regulation in legal practice, describe the regulatory requirements for professional indemnity insurance (PII), and analyse how PII operates as a risk management tool for solicitors and law firms. You will also be able to apply these principles to SQE1-style scenarios and identify the ethical and regulatory implications of PII in practice.

SQE1 Syllabus

For SQE1, you are required to understand the principles of risk-based regulation and the role of professional indemnity insurance in managing risks in legal practice. Focus your revision on:

  • the concept and application of risk-based regulation in legal services
  • the SRA's regulatory objectives and principles relevant to risk management
  • the regulatory requirements for professional indemnity insurance (PII), including minimum terms and conditions
  • the function of PII in protecting clients and the public interest
  • the impact of PII on firm risk management and decision-making
  • ethical and compliance considerations relating to PII and risk

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. What is risk-based regulation and how does it influence the SRA's approach to supervising law firms?
  2. Which of the following is a required feature of SRA-compliant professional indemnity insurance (PII)? a) Minimum cover of £1 million for all firms b) Cover for civil liability claims arising from professional practice c) Exclusion of claims arising from dishonesty d) No requirement for run-off cover
  3. Why is PII considered essential for client protection in legal practice?
  4. What are the consequences for a law firm that fails to maintain adequate and appropriate PII cover?

Introduction

Risk-based regulation is central to the modern supervision of legal services in England and Wales. The Solicitors Regulation Authority (SRA) uses this approach to identify, assess, and manage risks to its regulatory objectives, focusing resources on the most significant threats to the public interest and the integrity of the profession. Professional indemnity insurance (PII) is a key element of this system, providing financial protection for clients and supporting public confidence in legal services.

Risk-Based Regulation: Principles and Application

Risk-based regulation means the SRA targets its regulatory activity at the areas of greatest risk to its objectives, such as protecting the public, upholding the rule of law, and maintaining trust in the profession.

Key Term: risk-based regulation
A regulatory approach that identifies, assesses, and prioritises risks to regulatory objectives, focusing resources on the most significant threats.

The SRA's regulatory objectives include protecting consumers, supporting the rule of law, and encouraging an independent and effective legal profession. Risk-based regulation allows the SRA to:

  • monitor firms for risks such as financial instability, poor systems, or high claims history
  • require firms to implement risk management systems
  • intervene or take enforcement action where risks are not managed

Firms are expected to manage their own risks proactively, including those relating to client money, conflicts, and professional negligence.

Key Term: regulatory objectives
The statutory aims set out in the Legal Services Act 2007 that guide the SRA and other regulators, including protecting the public interest and promoting consumer protection.

Professional Indemnity Insurance (PII): Regulatory Requirements

Professional indemnity insurance is a mandatory requirement for all SRA-authorised firms and freelance solicitors providing reserved legal services. PII protects clients and third parties from losses caused by a firm's civil liability, such as negligence or breach of duty.

Key Term: professional indemnity insurance (PII)
Insurance that covers a law firm's civil liability to clients and others arising from professional services, including negligence and certain other claims.

The SRA Indemnity Insurance Rules set out the minimum terms and conditions (MTCs) for PII. Key features include:

  • cover for all civil liability claims arising from professional practice
  • minimum cover of £2 million for partnerships and sole practitioners, and £3 million for incorporated firms (companies and LLPs)
  • no exclusion for claims arising from dishonesty or fraud by employees or partners
  • cover for defence costs in addition to the policy limit
  • run-off cover for firms that close, providing protection for at least six years

Firms must ensure their PII is "adequate and appropriate" for their practice, which may require higher cover than the minimum.

Key Term: minimum terms and conditions (MTCs)
The SRA-prescribed requirements that all PII policies must meet, ensuring a baseline level of client protection.

Worked Example 1.1

A two-partner law firm arranges PII cover of £2 million, the minimum required for partnerships. The firm regularly handles commercial property transactions worth £10 million. Is this level of cover adequate and appropriate?

Answer: No. Although the cover meets the minimum, it may not be adequate for the firm's risk profile. The firm should assess its typical transaction values and consider increasing its cover to reflect potential liabilities.

The Role of PII in Risk Management

PII is a core risk management tool for law firms. It provides a financial safety net for clients and the public if a firm is negligent or otherwise liable for civil claims. PII also supports the SRA's regulatory objectives by:

  • ensuring clients are compensated if things go wrong
  • maintaining public confidence in the legal profession
  • encouraging firms to identify and manage risks to avoid claims

Firms must regularly review their risk profile, claims history, and practice areas to determine the appropriate level of PII cover.

Key Term: risk management
The process by which a firm identifies, assesses, and controls risks to its business, clients, and compliance obligations.

PII and Ethical Responsibilities

Maintaining adequate PII is not just a regulatory requirement—it is an ethical obligation. Solicitors must act in the best interests of each client and safeguard client money and assets. PII demonstrates a firm's commitment to client protection and professional accountability.

Key Term: best interests of the client
The duty to put the client's interests first, including taking steps to protect them from foreseeable harm.

PII also reinforces the principle of public trust and confidence in legal services. Failure to maintain PII can result in regulatory action, loss of authorisation, and reputational damage.

Worked Example 1.2

A solicitor misses a court deadline, causing a client to lose a valuable claim. The client sues for negligence. The firm's PII policy covers the loss, compensating the client and protecting the firm's financial stability.

Answer: This example shows how PII operates as a safety net for both clients and the firm, fulfilling regulatory and ethical duties.

PII and Firm Decision-Making

PII requirements influence firm management decisions, including:

  • which practice areas to offer (some areas attract higher premiums)
  • client acceptance policies (firms may decline high-risk clients)
  • investment in risk controls (such as staff training and IT systems)
  • resource allocation to ensure compliance and claims prevention

Firms with poor claims records may face higher premiums or difficulty obtaining cover, which can threaten their viability.

Worked Example 1.3

A firm receives multiple negligence claims in one year. Its insurer increases the premium and requires the firm to implement stricter risk management procedures. The firm invests in new case management software and staff training to reduce future claims.

Answer: This scenario illustrates how PII requirements can drive improvements in firm risk management and influence business strategy.

Compliance and Enforcement

The SRA monitors compliance with PII requirements. Firms must:

  • arrange and maintain compliant PII at all times
  • provide evidence of cover to the SRA on request
  • notify the SRA if unable to obtain cover (which may lead to closure)
  • be open with clients about their PII arrangements

Failure to comply may result in enforcement action, including fines, suspension, or intervention.

Exam Warning

Failure to maintain adequate and appropriate PII is a serious regulatory breach. Firms without cover must cease practice and may be subject to SRA intervention. For SQE1, be prepared to identify the regulatory consequences of non-compliance.

Key Point Checklist

This article has covered the following key knowledge points:

  • Risk-based regulation targets the most significant risks to the SRA's regulatory objectives.
  • Professional indemnity insurance (PII) is mandatory for all SRA-authorised firms and freelance solicitors providing reserved legal services.
  • PII must meet the SRA's minimum terms and conditions (MTCs) and be adequate and appropriate for the firm's risk profile.
  • PII protects clients and the public by providing compensation for civil liability claims, supporting public confidence in legal services.
  • Maintaining PII is both a regulatory and ethical obligation, reflecting the duty to act in the client's best interests.
  • PII requirements influence firm risk management, decision-making, and compliance.
  • Failure to maintain PII can result in regulatory action, closure, and reputational harm.

Key Terms and Concepts

  • risk-based regulation
  • regulatory objectives
  • professional indemnity insurance (PII)
  • minimum terms and conditions (MTCs)
  • risk management
  • best interests of the client
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Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

Saptarshi Chatterjee

Saptarshi Chatterjee

Senior Associate at Trilegal