The Solicitors Regulation Authority (SRA) will seek to separate the roles of Compliance Officer for Legal Practice (COLP) and Compliance Officer for Finance and Administration (COFA) from ‘individuals that can unilaterally determine or direct significant management decisions’ with law firms, in its latest crackdown.
A newly launched client money consultation proposes to separate both roles from influential individuals within law firms to ensure “there are appropriate checks and balances on an individual who has power within, and control over, a firm.”
The move comes after the SRA was heavily criticised by an independent review for failings leading to the collapse of Axiom Ince. The report identified “significant risk” in the sole owner being the managing director and also holding all the compliance roles in the organisation.
Previous proposals put forward by the SRA suggested any manager that can make unliteral decisions about client money should not be able to hold a COLP or COFA role. This latest proposal widens the scope of that definition to include all individuals with influential roles within firms.
The SRA proposes some exemptions, including for sole practitioners and smaller practices which would struggle to fulfil the new obligations:
“…there would be an exemption for sole owner-manager firms, where the firm is captured solely because the amount of client money that they hold is £500,000 or higher at any point in the most recent reporting period. In this case the unilateral decision maker could still hold the COLP role but not the COFA role.”
An exemption would also apply to firms with an annual turnover under the threshold of £600,000 and/or has held a client account balance of less than £500,000 at any point in the most recent reporting period.
The latest consultation follows a controversial three-part consultation in November 2024, which suggested law firms should no longer hold client funds. Representative bodies hit back at the proposals, with the SRA announcing in September it would not be taking any immediate action.
Acknowledging the complex nature of removing client accounts, in its latest consultation the SRA says “there is a strong case to explore properly these longer-term framework questions,” and that it will continue to develop its thinking in light of the feedback that has been received.
Alongside the strengthening of checks and balances within the compliance officer roles, the latest consultation invites feedback on its proposals for the provision of accounts information to the regulator.
Currently, firms holding client money must obtain an accountant’s report annually. There are exemptions for firms only holding client money from the Legal Aid Agency during the accounting period, firms with an average client balance of no more than £10,000 over the accounting period, and where the balance has not exceeded £250,000 at any point during that period.
The regime is not designed to assess a firm’s financial statements, business accounts or financial resilience, the SRA said, and will not have insight into potentially failing firms. The SRA will only be notified via a qualified report if an accountant’s report identifies “significant breaches of the Accounts Rules and/or significant weaknesses in the firm’s systems and controls which put client money at risk”.
However, there is evidence of ‘concerning’ non compliance, the SRA said. A spot check carried out since the last consultation identified 25 firms that were not exempt had failed to obtain an accountant’s report for their last accounting period, from a total 596 surveyed. A further 31 firms obtained the report after the deadline of six months from the end of the accounting period.
In the latest proposals, the SRA said it could ask firms or their accountants to submit all reports to the regulator, via a prescribed form with a “standardised declaration by the reporting accountant confirming that they are qualified to prepare the report, that they have properly checked compliance with the Accounts Rules, that they have provided a copy of the report to the firm’s COFA, and whether they have qualified the report because they have found significant breaches of the Accounts Rules and/or weaknesses in the system and controls that could put client money at risk”.
Non-compliance would result in fixed penalties.
In a further consultation to be held next year, the SRA will review its oversight of firms that are significantly changing their profile, including through sales, mergers and acquisitions. “We currently collect and review information from law firms through various channels and at different points during a firm’s regulatory lifecycle,” the SRA said. “This includes at initial authorisation and when firms submit their annual returns through the Practising Certificate Renewal Exercise (PCRE). Firms are also required to notify the SRA at different points when certain things change, including when a firm is closing or being acquired, following ownership changes, and when a firm is in serious financial difficulty, amongst others.”
“Recently we have seen an increase in large firm failures and have identified examples of harms arising from firms growing beyond their competence, capacity or capability. We have seen problems arising in some cases from the failure to properly integrate people, systems and processes. At the extreme, we have seen allegations of a bad faith actor acquiring firms to defraud their client accounts.”
In order to better identify and target risks, the SRA thinks it will need to “collect additional, more timely information from some firms when they are changing their profile,” and will be “producing an initial set of risk indicators which if present in a transaction or other profile change might trigger additional regulatory scrutiny.”
In response to its previous consultation, the SRA said it had come to a decision on three points:
- It would not intervene in the requests for fees in advance of work being done or introduce a standardised cap. Despite anecdotally hearing firms may request more than needed, potentially for the purposes of cashflow or client account interest, it was ‘accepted practice’ to request fees up-front to run a case and mitigate the risk of no payment.
- There would be no change to the definition of ‘promptly’ in the return of residual balances to clients. Proposals to introduce a prescriptive timeframe were met with scepticism because of the no one size fits all nature of legal services.
- Updates to Solicitors Accounts rules will require firms to produce a bill or written notification for costs before transferring monies from client to office account, but do not need to deliver a bill or written notification before reimbursing themselves where it relates to expenses incurred on behalf of the client.
The consultation is open until 20 February.
