Looking to the future: professional compensation – Lexology
We describe and explore the impact of COVID-19 on small businesses, law firms, construction professionals, appraisers, brokers, AFIs and accountants and what it has meant to them in terms of claims .
The direct impact of COVID-19 and the shift to working from home will dominate a number of important sectors of the professional liability market in 2021
The redeployment of staff in response to rapid growth in some areas of work and overnight stagnation in others caused by lockdown and new ways of working will have resulted in large numbers of professionals working outside of their usual areas of practice under light supervision, at a time when they may have faced significant personal and logistical pressures. Mistakes will have been made and may be detected more slowly than would have been the case before the lockdown.
The uncertainties of Brexit and the last-minute nature of the negotiations will have made it much more difficult for many professionals to advise their clients. By mid-December 2020, almost half of SMEs said they were not prepared for the end of the Brexit transition period.
History has also taught us that there is a correlation between the recession and claims against professionals, so as the economy weakens, a resurgence of claims seems inevitable. Against this somewhat gloomy background, we envision the future of several professions.
The press has been pessimistic about the small firms and law centers that have survived the pandemic. Many small businesses were struggling before COVID-19. Lack of staff, changing types of work, and the need for significant investment in technology to enable working from home have perhaps been the last straw for some.
While few complaints were issued during the second and third quarters of the year, notifications of complaints against notaries increased sharply, in particular in the area of private clients and real estate.
Claims associated with poor supervision (including working from home), the use of unfamiliar technologies, rapid legislative changes, and remote hearings are likely to focus on missed deadlines, confidentiality / data breaches, delayed or failed completions and document errors, including improper execution. In the longer term, complex new rules for remote witnessing of wills can give rise to claims of improper execution, identification issues and undue influence. Reductions in the zero-rate band for SDLT can also give rise to claims if lawyers’ actions delay completions and additional taxes become payable.
Finally, we anticipate claims arising from the reduced need for commercial properties; a business that wants to reduce its office space can file a claim if it finds out that there is no termination clause in its lease.
The Grenfell tragedy will continue to have repercussions throughout the construction industry, as the practices of those involved in the specification, manufacture and testing of coating materials come to light. COVID-19 will also continue to have an impact, both in terms of delays caused to projects (and who should pay for them) and the extent to which they should be classified as force majeure, all the more so that the construction sector has not closed its doors, even during the national lockdown. COVID-19 has also led to excess office capacity and an acceleration in demand for conversion to residential, with an increased risk of litigation and claims that such a change in use entails.
The tough insurance market facing consultants seems unlikely to ease and they continue to face the challenges of rising premiums and restrictive exclusions, raising concerns about how they may stay in practice and comply with their professional obligations to purchase adequate insurance. However, the impact of the sharp rise in premiums has now been widely felt and, barring any other unforeseen global catastrophe, the hope is that the industry can realign itself. Previous widespread difficulties in securing renewal due to a combination of reduced capacity and a hostile accountability environment have sparked a genuine desire for brokers to help their policyholders mitigate the worst effects of these trading conditions as the insurers who underwrite these risks have a renewed interest in risk assessments and in taking sound risk management measures. The current industry movement towards BIM level 3 and the widespread digital agenda encourages a more collaborative and less confrontational approach to construction. Meanwhile, off-site and more modern construction methods leading to the incorporation of factory building elements, mean that the risk profile of all members of the construction team needs to be reassessed.
Litigation against appraisers is a traditional solution when real estate markets are stagnant. As businesses close, commercial lenders will seek to recover money lost if borrowers default. As the shift to working from home affects both the demand for office space and satellite retail space, such as coffee shops, it may be more difficult for direct lenders to offload business space and they may turn to appraisers. to recover some of their losses.
In the housing market, while the zero rate bracket of £ 500,000 SDLT has been extended until June 30, 2021, it will then be reduced to £ 250,000 until September 30, 2021 and return to its usual £ 125,000 thereafter . This can cause a bubble as buyers scramble to buy before the zero rate range narrows, followed by a collapse as cuts begin. however, the COVID-19 payment holidays are scheduled to end on July 31, 2021. A surplus of repossessed property and disappointing auction results can lead to claims that properties have been overvalued.
The private rental sector is also struggling as rental income disappears, leases cannot be enforced but maintenance and repair obligations remain. We expect to see an increase in complaints against agents who fail to take action to protect their client-owners and the buildings they manage.
An FCA survey of the financial resilience of companies shows that brokers’ cash liquidity has declined by 30% since February 2020, raising concerns about their liquidity.
The COVID-19 pandemic has led to widespread claims under business interruption policies. Following the January Supreme Court ruling in the FCA business interruption test case, we expect claims against brokers arising from their pre-found advisory duties and obligations. Where the claimant is an individual or a small business, complaints can be handled by the Financial Ombudsman Service. If the disputed policy is renewed after April 1, 2019, the increased limit of £ 355,000 FOS will apply.
On an individual level, investors are likely to feel poorer. Falling stock and real estate prices, resulting in reduced investment income and lower capital values, are likely to lead to claims, especially when FOS is free at the point of use.
Pension transfers remain a problem. The number of law enforcement actions involving IFAs is expected to increase, especially as the FCA has said it will look into small businesses and those that fail to consistently meet its standards.
In recent years, we have seen an increasing disconnect between a company’s expectations of its auditors and the audit role, which has resulted in an increase in complaints and requests for regulatory change. While the combination of Brexit and COVID-19 has meant that many audit reform recommendations have been put on hold, regulatory reform remains a priority and is firmly on the agenda for 2021.
In terms of case law, in August 2020, the Court of Appeal issued its judgment in AssetCo Plc v Grant Thornton UK LLP, regarding the scope of the obligation and the legal causal link in the context of auditor negligence cases, and the application of the SAAMCO cap on cases of auditor negligence in general. The case demonstrates that when an auditor did not negligently identify in his audit the dishonest cover-up of the plaintiff’s insolvency, he was liable for the business losses resulting from the plaintiff’s continued conduct of his insolvent business.
Recent financial pressures on businesses, which have led to fraud and / or business collapse, have made the situation even worse and we also expect an increase in the number of audit-related claims where fraud or insolvency is a feature.