The SRA announced on 2nd June that, following their consultation on protecting client money earlier this year (see our report in our January update), they have decided to push ahead with their proposed reforms “to strengthen protections around client money”. Although their proposals are still subject to the approval of the Legal Services Board (LSB) (which the SRA can’t take for granted given the LSB’s refusal to agree the SRA’s proposed complaints-handling rule changes in January), it is likely that we will see these in place by early next year.
What will change?
Accountants’ Reports
All law firms that hold client money will be required to submit annual accountants’ reports to the SRA (whether ‘qualified’ or otherwise) and provide key further information through a declaration. Those law firms exempt from obtaining such reports pursuant to Rule 12.2 of the Accounts Rules (i.e. low levels of client money held) will be required to provide information on their exemption status. Failure to comply will result in fixed penalty fines.
For those long enough in the tooth to remember, this is what the position used to be until 2014, when the SRA watered down the requirement so that only ‘qualified’ accountants’ reports had to be submitted. Whilst it will identify those firms who currently just don’t bother obtaining the annual report, more data coming in is only valuable if something useful is done with it. The problem the first time around was that the SRA didn’t have the capacity to analyse the reports they received and use the data to assess firms’ risks. Is the position likely to be any better in 2027?
It is no secret that the SRA are suffering with capacity issues (think, the significant increase in misconduct reports they referenced in May, and the latest consultation on their draft business plan and funding requirements in which they are seeking to increase their overall budget by £25 million (29%) for 2026/27 to plug various holes). Will the SRA really have the ability to do something useful with that data, even if they get their huge cash-injection via the practising certificate fee? Perhaps in the first instance they would be better to focus on bringing back the Risk Team they had until about 2013, the main job of which was to profile firms against various risk factors and take proactive (rather than reactive) steps, before opening the floodgates on accountants’ reports?
Separation of roles
Firms with a turnover of more than £600,000 or holding more than £2m of client money (at any point in the most recent reporting period) will no longer be able to have one person who can “unilaterally determine or direct significant management decisions” also holding the roles of COLP or COFA. Although there will be a partial exemption for smaller sole owner-manager firms who will be able to hold the COLP role (but not the COFA role), and the SRA have increased the client money element from the originally proposed £500,000 to £2m, this proposed rule change is likely to impact a significant percentage of firms (if not the majority).
The point to note here is that it is not just the separation of the COLP and COFA roles, but that both those roles must be separated from the managing partners or indeed anyone else who can make ‘significant decisions’ about how the firm is run. Finding individuals with sufficient compliance knowledge and seniority is already a significant challenge. Pulling a senior person away from their day job to take on a compliance role they may have little experience of, or interest in, doesn’t obviously reduce risk. It may actually increase it, with less senior staff ending up in compliance roles (because arguably, anyone who is in a senior/ partner level position can make decisions about how the firm is run, and so will be excluded) and the importance of those roles being quietly diminished in the process. One wonders if this is a change which may come back to bite the SRA (and firms) further down the road.
What next?
As these proposals are still just that, and, subject to LSB approval, implementation is still some months away, there is no need to panic. However, it would be worth starting to think about how the COLP & COFA roles might be separated, who might be best-placed to take them on, and what sort of training is likely to be required before next year.