The Solicitors Regulation Authority (SRA) has confirmed the first intended actions to come out of recent client money consultations.
“Higher risk” firms with a turnover of more than £600,000, or holding more than £2 million of client money, must make sure no single individual can both run a firm and oversee its compliance, including with client money rules. The change will reduce the risk that conflict or weak internal challenges will allow problems to go undetected and unreported, the SRA said.
There will be a partial exemption for smaller sole owner manager firms, where there are practical constraints to separating out roles and where the firms generally present different risk characteristics to larger or more complex practices.
Firms that hold client money will be required to submit annual accountants’ reports to the SRA and provide key further information through a declaration. Where exemptions apply, firms will be required to provide information on their exemption status. The regulator warned financial penalties will be levied for late or non-submission.
The rules effectively prevent senior decision makers from performing Compliance Officer for Legal Practice (COLP) and Compliance Officer for Finance and Administration (COFA) roles in firms which meet the turnover threshold.
The proposals are subject to approval by the Legal Services Board (LSB) and are expected to come into force by early next year.
The SRA had signalled its intentions to separate the roles from “individuals that can unilaterally determine or direct significant management decisions” in a consultation published in December last year. The proposal formed part of a wider programme of work outlined in the SRA’s draft 2026/27 business plan.
Client money and protection has been visibly high on the SRA’s agenda following its admonishment for failures around Axiom Ince, SSB Law, and PM Law. The regulator said it is also considering whether senior individuals in firms should have clearer personal responsibility for protecting client money and managing risks.
Sarah Rapson, chief executive of the SRA, said: “Protecting client money is one of our most important responsibilities and developing our ability to proactively identify and address risk is a priority. That is why we are making changes that will help us identify risks earlier, strengthen accountability within firms, and reduce the likelihood of harm to consumers.
“As we outlined in our draft business plan, we are taking a broader look at whether firms should continue to hold client money in the way they do today. In the meantime, these reforms are an important step to mitigate risks within the current framework. We must build a more flexible and responsive framework, if we are to act quickly where risks emerge.”
In its response to the SRA’s consultation earlier this year, The Law Society of England and Wales described the proposals as “complex and impractical“.
Responding to the SRA’s latest announcement, Law Society president Mark Evans welcomed the “ambition to strengthen consumer protection and enhance the robustness of the client money framework”, but said the Law Society remains concerned about key features of the SRA’s proposals, including the separation of compliance roles based on the levels of turnover and client money held.
He explained: “The SRA proposes thresholds to determine separation of roles based on turnover and client money held in a reporting period. We are pleased that the client money threshold has been increased, although it may still be too low for some smaller firms. We are disappointed that the turnover threshold has not been increased, and the figure was arrived at by the SRA without any risk-based analysis or modelling, which we consider essential.
“In smaller firms, separation of compliance roles is likely to be ineffective, and impractical. This is because it is unlikely to prevent the perceived risk as owner-managers will still have effective control even if the Compliance Officer for Finance and Administration (COFA) is a third party or employee. It is unlikely to improve outcomes, with a risk of weakening rather than strengthening compliance. Small and medium sized firms would be unfairly impacted by increasing costs which are likely to be passed on to consumers and adversely affect access to justice.
“The proposals risk disproportionately affecting Black, Asian and minority ethnic solicitors, who are overrepresented in the small firm sector, as well as practitioners in legal aid, community-based work and sole practice environments.
“Client accounts remain a fundamental tool for the efficient and effective delivery of legal services. We urge the Legal Services Board to consider our concerns and either modify the SRA proposals or require robust post implementation monitoring and review.”
