Posted by Jen Dunlop, managing director, and Jess Irwin, senior consultant, of Compliance Office, on behalf of Legal Futures Associate VinciWorks
Jen Dunlop
In June, we discussed the Solicitors Regulation Authority’s (SRA) consultation on client money in legal services. It proposed two significant changes.
First, the requirement for all firms to submit annual accountants reports, and second, changes to compliance officer arrangements to separate compliance and decision-making roles within law firms.
The Legal Services Board (LSB) has now given the green light to those significant rule changes and, while the direction of travel is sensible, the practical detail will determine whether these reforms genuinely strengthen consumer protection or simply add cost and complexity without delivering the intended benefit.
This will depend on practical SRA guidance that has not yet been published.
What’s changing
Following its consultation launched last December, which was prompted in part by high-profile firm failures such as Axiom Ince, the SRA has secured LSB approval for two connected reforms:
Separating management and compliance roles. In all but the smallest firms, individuals who can ‘unilaterally’ make management decisions will no longer be permitted to hold compliance officer roles (COLP/COFA) at the same time.
Implementation will be phased from January 2027 onwards, with larger firms required to comply first, and the SRA is aiming for the changes to be fully implemented by April 2027.
The turnover exemption threshold stays at £600,000, with the client money threshold raised from £500,000 to £2m following consultation feedback. This means that small firms will get some meaningful relief and sole owner-manager firms below the client money threshold (but above the turnover threshold) can still combine the COLP role with ownership (though not the COFA role).
Mandatory accountants’ reports. All firms required to obtain annual accountants’ reports under the accounts rules will (from April 2027) now need to submit the report to the SRA, regardless of whether that is qualified or not, or face fixed financial penalties.
Firms that are under the threshold will be required to submit a declaration to the SRA confirming their exemption status.
Jessica Irwin
Notably, following its consultation, the SRA dropped its original proposal for accountants to submit reports directly to the regulator, despite the LSB and the Legal Services Consumer Panel both flagging “significant consumer benefits” to that model.
The SRA says there is still “merit” in direct submission but that liability, accountability and sector-readiness issues need resolving first. The LSB has told the SRA to keep moving on this.
Both the Law Society and the Sole Practitioners Group opposed the changes, citing concerns about the impact on small firms. The LSB, for its part, also flagged a genuine tension worth taking seriously, that increased compliance costs could be passed on to consumers, potentially affecting access to justice, and it has now required the SRA to monitor this and report back on any significant concerns.
Two things worth thinking harder about
On accountants’ reports: submission alone isn’t the win. Requiring every firm in scope of the rules to submit an annual report, qualified or not, is sensible in principle as it closes the current gap where firms with a ‘clean’ (unqualified) report simply don’t have to submit anything at all (and no one is policing whether they did in fact obtain one).
That is precisely the kind of blind spot that lets problems build undetected in cases like Axiom Ince.
It’s worth remembering that this is not a new idea from the SRA. Until 2014, when the SRA scaled it back to require only the submission of qualified reports, all firms had to submit their annual reports. The issue was that very little was done once they were received. The SRA simply did not have the capacity to analyse them.
That capacity question has not gone away. The value of universal submission depends entirely on what happens after the report lands on the SRA’s desk.
If the regulator doesn’t have sufficient staff and genuine sector expertise to actually review (and act on) what’s submitted, this becomes an expensive paper exercise for firms that generates a false sense of assurance rather than providing real oversight.
Before this rule delivers its intended benefit, the SRA needs to show its review capacity is scaling alongside the volume of reports it’s about to receive.
On separating roles: the real risk isn’t just small firms, it’s competence and seniority everywhere.
The headline concern, rightly raised by the Law Society and Sole Practitioners Group, is the burden this places on SME law firms, many of which lack the depth of team to genuinely separate these functions without real cost. We share that concern.
There is also the question of who can and cannot hold these roles, with the draft rules stating an individual cannot be designated as its COLP or COFA if the individual is a manager or owner of the authorised body who has authority to unilaterally determine or direct significant management decisions relating to the structure or running of the authorised body.
The SRA will need to issue detailed guidance on what this means in practice.
But there’s a second-order risk that applies well beyond the smaller firms, and that is that mandating separation doesn’t automatically produce a good compliance function, it just produces a separate one.
Firms of any size could end up appointing someone into a COLP or COFA role who has 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.
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.
The bottom line
Both reforms respond to real and well-evidenced gaps in the current framework. The SRA’s willingness to raise thresholds and phase implementation after consultation feedback shows it’s listening. But structural change on paper is only half the job.
Whether these rules meaningfully improve consumer protection, rather than just adding cost that gets passed down the chain, will come down to two practical questions:
- Does the SRA have the resource to properly scrutinise the accountants’ reports it will now receive?
- Will firms appoint compliance officers with the seniority and genuine commitment to the role that separation is supposed to guarantee?
The answers will only become clear once the SRA publishes its guidance.
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