Kate Burt, solicitor and founder of legal risk and compliance consultancy HiveRisk, warns law firms not to rush into costly restructuring decisions as concerns grow over the practical impact of the SRA’s new Rule 8.4.
Rule 8.4 of the Solicitors Regulation Authority’s Authorisation of Firms Rules, approved by the Legal Services Board and due to be introduced in phases from 2027, is intended to strengthen regulatory oversight by preventing individuals with significant unilateral management power from also holding key compliance roles.
But there are growing calls from law firm owners for the SRA to address concerns over whether the rule is proportionate, sufficiently clear and workable for smaller and mid-sized practices. Among the most contentious aspects is the fact that a firm can fall within the financial scope of the rule even if it does not hold client money.
This has prompted questions over whether a reform developed in the context of strengthening client-money protections could force firms with no client account to reconsider their management and compliance structures, with potentially significant consequences.
The issue is not simply whether firms support stronger consumer protection. It is whether this mechanism is effective, proportionate to the risk and workable in practice. For some smaller firms, changing who can act as COLP or COFA, or altering governance arrangements around those roles, is not a minor adjustment; it could destabilise how their business operates.
Practical implications
Under the approved Rule 8.4, the relevant financial thresholds are alternative rather than cumulative. A firm with more than one manager or owner can fall within scope if it has annual turnover above £600,000 or holds or receives client money with a maximum statement or passbook balance exceeding £2 million.
The restriction then applies where the individual acting as COLP or COFA is also a manager or owner with authority to unilaterally determine or direct significant management decisions. It’s this aspect of the rule causing concern because of its practical implications.
The policy logic is difficult to understand. The SRA has explained turnover is being used as a proxy for size and wider consumer impact, but firms are reasonably asking why £600,000 is when the risk is deemed to change.
The same question arises over the £2 million client-money threshold. Firms are entitled to ask why that figure represents the point at which governance risk is considered sufficiently different to justify the restriction, particularly where the balance may or may not fluctuate on its own, reflect the complexity or risk profile of the practice.
Unintended consequences
In many small practices, compliance responsibilities sit with an owner, managing partner or senior director precisely, because that person has the authority and knowledge to challenge decisions and understand the firm’s risks.
Where a firm cannot resolve the issue through changes to its governance arrangements, replacing that individual with an additional senior appointment may not be straightforward.
Prudent candidates are unlikely to take on personal regulatory responsibility without meaningful access to the business, board-level visibility and the authority to challenge management which could make the role expensive to fill.
For firms operating on tight margins, particularly smaller high-street and specialist practices, the additional non-fee-earning cost could be commercially significant.
A poorly judged response could weaken compliance rather than strengthen it. Firms might assign the roles to someone unsuitable simply because they fall outside the management structure. This could leave a firm with a compliance officer who meets the formal criteria but lacks the experience, authority or influence to challenge the owners, ultimately resulting in weaker governance.
Immediate pressure
The new regime is expected to be introduced on a phased basis from early 2027, with smaller firms given longer to comply. However, the phased approach does not remove the need for firms to assess their position now.
Law firms considering changes to COLP or COFA appointments, succession arrangements, retirements, recruitment or internal governance need to understand how the new eligibility requirements may affect those decisions.
Hiring a suitably experienced compliance officer can take months. Senior candidates may have long notice periods, while internal appointments require careful consideration of authority, reporting lines, access to information and personal regulatory exposure.
Businesses are making hiring and restructuring decisions now, but without the detailed guidance and worked examples needed to make confident, informed decisions.
Lack of clarity
The SRA’s published update of 4 September was intended to provide greater clarity on Rule 8.4 and confirmed that further guidance and case studies would follow. However, concerns remain among firms about how the test will operate in practice.
One of the SRA’s suggested solutions to overcome the ‘unilateral decision maker’ restriction is to appoint a management board or use another mechanism to allow significant decisions to be made jointly. But there is uncertainty around what constitutes “shared” or collective decision-making in practice.
Many firms operate through discussion, consensus and delegated authority rather than strict unilateral control, yet there remains limited guidance on where the line will be drawn. Without clearer examples, firms are left trying to assess whether their existing governance arrangements are sufficient.
Pause for thought
A growing number of firms are calling for the SRA to pause implementation while practical issues are addressed. The newly formed SME & Boutique Law Firm Alliance delivered an open letter to the SRA on Friday calling for a pause and reconsideration.
There are also calls for further scrutiny of the commercial impact on small and mid-sized firms, particularly the cost and availability of suitable compliance officers where replacement is necessary, and how this could affect the way these businesses operate.
There are legitimate questions over whether Rule 8.4, as it currently stands, is the right and proportionate way to achieve more robust governance. Firms are being urged to consider their options but avoid making immediate changes that could be detrimental to their business until regulatory guidance is clearer.
Amid the uncertainty, pressure for a pause and reconsideration is unlikely to disappear until there has been a satisfactory response from the SRA.
Law firms that share these concerns can still give their support to the SME & Boutique Law Firm Alliance’s open letter to the SRA. The letter, currently signed by more than 70 law firms remains open for signatures at smeblaw.co.uk.
