Things move fast in the compliance world! In our July update we reported on the SRA’s decision to go ahead with its plans to strengthen protections around client money following its consultation earlier this year, focussing on Accountants’ reports and the separation of management and compliance roles.
After an apparent error in the SRA’s drafting of its proposed new rules to address the COLP/ COFA reforms in failing to include the word “unilateral” when addressing which “decision makers” in a firm could not also hold the COLP/ COFA roles, it is probably fair to say that all hell broke loose! The word “unilateral” in relation to “decisions makers” was reinserted during the LSB approval-process but this didn’t allay the concerns of smaller firms, significant numbers of which will be impacted by the new rules, given the thresholds involved: turnover of more than £600,000 and/ or client money held of more than £2 million.
We provided further thoughts on the plans in September, expressing concerns, not just about the impact on smaller firms, but also about the impact on the compliance roles in general. Firms of any size could end up appointing someone into a COLP or COFA role with limited interest or genuine expertise in compliance and, just as importantly, insufficient seniority within the partnership to actually push back when it matters. A compliance officer who can be talked around, ignored, or simply outranked in a partnership meeting provides the appearance of separation without the substance of it. Our conclusion was that if the LSB and SRA want this reform to actually reduce the risk of the next Axiom Ince, the emphasis needs to be as much on the calibre, independence and standing of the person appointed as on the structural separation itself.
We were promised detailed guidance from the SRA in the ‘autumn’, which also caused much consternation, given the proposed roll out of the changes from January, leaving very little time for firms to make the necessary changes and possible new hires. And then, all of sudden (albeit following mounting pressure from the Law Society and newly formed SME & Boutique Law Firm Alliance), the announcement came at the end of September that the SRA had decided to pause its plans while it considers the feedback and practical implications. Quite what happens next remains to be seen. The underlying questions around independence, oversight and governance are unlikely to disappear completely, but there is also a possibility that the proposals may evolve considerably (or even quietly disappear??), particularly as other regulatory priorities emerge (see our blog on the ‘SRA powers re privileged material’ for example).
If the issue does return, hopefully it will be with a more considered and proportionate approach, clearer guidance and a timeframe that gives firms a realistic opportunity to prepare and implement any changes required.
For now, there is nothing that firms need to do in response to the paused proposals, other than perhaps to breathe a large sigh of relief! We will keep an eye on developments and let you know if there is anything that requires your attention. In the meantime, if you have any questions or would like to talk through how this may affect your firm, please do get in touch.