The SRA has announced reforms which it hopes will strengthen client money protection and ensure ongoing compliance.
This follows serious criticism of its handling of Axiom Ince and PM Law, and the SRA has previously consulted on some of these measures.
The proposals
1. All firms which hold client money will be required to submit an annual accountant’s report to the SRA and provide more information through a declaration. There will some exemptions, and there will be fines for non-compliance.
The devil will be in the detail, but at the very least this will add a heavier administrative burden and higher compliance costs for law firms.
To work effectively the SRA will need effective systems to monitor the huge volume of data this measure will produce. This seems a sensible area for the (already under-resourced) SRA to harness technology solutions. This will require investment, presumably another factor that has contributed to the significant increases in practising certificate fees (alongside compensation fund contribution increases).
This measure stops short of the more seismic proposals, including that law firms should not hold client monies, although the SRA says these remain under consideration. The mood at the SRA’s annual COLP & COFA conference in 2025 suggested this was hugely unpopular. It also sat uncomfortably next to the Ministry of Justice’s (now closed) early 2026 consultation on whether or not a proportion of interest earned on law firm client accounts should be remitted to the Government.
The draft rules attached with the closed consultation clarify that if a firm has more than one manager or owner (i.e. not a sole practice), and
– has annual turnover of over £600,000; or
– holds client monies in excess of £2m,
then an individual cannot be the COLP or COFA if they have authority to determine or direct significant management decisions relating to the structure or running of the business.
The SRA initially indicated this would relate to decisions made ‘unilaterally’, but the draft Authorisation Rules do not reflect this ‘unilateral’ criterion.
This is a significant change for law firms, as many firms appoint the firm’s managing partner or board members as the COLP and COFA given the heightened responsibilities those roles entail. It appears that this wont be possible in the future. This will affect both new and existing appointments.
Most firms reserve some decisions to the partners as a whole. These will often be fundamental issues concerning the structure or running of the business, such as partner admissions/exits, large financial commitments and mergers. In such cases a single partner alone does not determine or direct the issue, but together the partners make those decisions. Does that mean all partners are excluded from holding the COLP and COFA roles? Guidance on this point would be welcome because, although each firm’s circumstances must be considered on a case by case basis, this scenario is very common in law firms.
Also, some smaller firms will rely on significant influence as a means to assure their taxation as self employed persons under the salaried member tax rules. While the rules are not connected, it is hard to see how a firm could argue that a partner has decision making influence under the tax rules but not under the SRA Standards.
There are broader questions to address. If partners involved in management are not the COLP and COFA, how can firms ensure that the COLP and COFA have access to the levels of information required to effectively discharge the role of COLP and COFA? The SRA would expect the COLP and COFA to be involved in difficult decisions about complex risk issues, but these new measures are designed to exclude the firm’s senior decision makers from those roles, so care will be needed to ensure the COLP and COFA aren’t only receiving partial information or aren’t fully involved in the discussions. Firms will want to ensure that the COLP and COFA have authority to make a report, take (confidential) advice at the firm’s expense and benefit from an indemnity for serving as COLP/COFA. Many of these protections already exist for partners, but not always for employees.
Finally, if firms take the view that the COLP and COFA cannot be a manager or owner (e.g. one the partners) then there is the inherent issue that an employee may feel their continued employment is in practice contingent on agreeing with management decisions. Is that an effective regulatory control?
Timeframe
Assuming the LSB approves them, the SRA expects the new rules to come into effect in early 2027.
What should firms do?
There is no need to panic. The rules are expected in 2027, so there is time for firms to address the changes and their implications. Ideally the rules will be published well in advance of their implementation to give firms time to plan.
Law firms might consider some or all of the following:
- Adjust the finance team’s process and timetable to accommodate the new requirements, and allow time to discuss and agree whether or not declarations can be made.
- Budget for additional accounting and compliance costs.
- If appropriate, replace the existing COLP and COFA. For firms with turnover over £600,000 approval cannot be deemed and there must be an application to the SRA. The SRA says it will try to process these within 30 days, but it may take 90 days. We can assume that there will be a high volume of applications as a result of this change, so presumably firms should assume the longer time frames. Firms may need to consider if the firm’s BOOMs need to be reviewed and updated as a result.
- Review and amend the firm’s constitution, policies and working practices to accommodate the changes. This is a simple sentence, but this is likely to be complex and time consuming in practice. For example, at larger firms, whole risk teams and reporting lines may need to be restructured, LLP Agreements may need to be varied (usually a high threshold partner body decision) and KPIs and associated compensation systems may need to be adjusted as partners’ roles change.
If you have any questions or would like explore any of these issues, please contact Corinne Staves, Nick Leale or Andrew Pavlovic.
