The Fidelity Fund – How it works and why recent reforms are good for the profession
Recent changes to the laws governing the management of the Legal Practitioners' Fidelity Fund are good news for the legal profession and the community.
What is the Fidelity Fund?
The primary purpose of the Fidelity Fund is to fund the regulation of the profession. Monies from the Fund cover the expenses of the Legal Professional Conduct Commission, the Society’s Ethics and Practice Unit and the tribunal costs for legal practitioner disciplinary matters. About 98% of expenditure from the Fund goes to regulation of the profession.
The Fidelity Fund is also a fund of last resort for claims against practitioners. It provides an avenue for claimants to be reimbursed for a fiduciary or professional default by a legal practitioner where there is no reasonable prospect of recovering the full amount of that loss from elsewhere.
A “fiduciary or professional default” in relation to a legal practitioner is defined in section 5 of the Legal Practitioners Act 1981 (SA) as follows:
“any defalcation, misappropriation or misapplication of trust money received in the course of legal practice by the legal practitioner or an incorporated legal practice or firm of which the legal practitioner is a member; or any wrongful or negligent act or omission occurring in the course of the practice of the legal practitioner, or an incorporated legal practice or firm of which the legal practitioner is a member, whether committed by the legal practitioner, an employee of the legal practitioner or any other person”
Over the past 10 years, claims paid out of the Fidelity Fund have comprised less than 2% of the Fund’s expenses.
How is the Fidelity Fund funded?
In simple terms, the Fidelity Fund primarily derives its revenue from the interest on solicitor trust accounts, but also receives funds from a portion of practicing certificate (PC) fees, and returns on investments.
The Society is responsible for managing the Fund, including making investment decisions, but does not have control over how the monies from the Fund are spent.
Where else does money from the Fidelity Fund go?
The Fidelity Fund is capped. Any revenue that exceeds this cap must, in accordance with the Legal Practitioners Act, be distributed to the Legal Services Commission or another purpose as approved jointly by the Attorney General and the Society.
Under current laws (which will be replaced by the recently passed laws at a commencement date to be advised) the cap is calculated by multiplying $7,500 by the number of lawyers with South Australian PCs. Where the value of the Fidelity Fund exceeds the cap, as it did in the last financial year, surplus monies are transferred to the Legal Services Commission (LSC).
How is the cap calculated under the new laws?
When the new laws come into operation, the cap will now be calculated by multiplying $11,500 by the number of PC holders.
Why is this an important reform?
The Fidelity Fund has been through a tumultuous decade due to fluctuating interest rates. The Fund was in decline from 2013 to 2022, reducing from $27 million to $13 million - more than halving in value in seven years.
In the past two financial years (2022/23 and 2023/24), the fund has significantly increased in value. The turnaround has been caused by three main factors:
- A $200 increase in PC fees (set by the Attorney General)
- A reduction in the budget of the Legal Practitioners Conduct Commissioner
- An increase in interest rates
The Society has argued that the Fund should be somewhat protected against the vagaries of interest rates by reaching a value that would enable a steady return on investments without being held hostage to interest rate variations. The Society considers that the recent amendment will achieve this.
Forecasts show that, with these reforms, the new, higher cap would be reached in 2028 and the Fund would then be self-sustainable under normal conditions. Importantly, forecasts indicate that the Fund would produce a surplus of $3 million, gradually growing year on year, for distribution to the Legal Services Commission.
The Society hopes the income generated from the Fund will also assist in funding longer-term strategic initiatives to support the regulation and practice of the law and address long-standing access to justice issues, particularly in rural, regional, and remote South Australia.