Accounts: SRA investigates direct submission by accountants
The Legal Services Board (LSB) has approved rule changes to separate law firm managers who can “unilaterally” make decisions from compliance officer roles in all but the smallest firms.
The LSB also approved new Solicitors Regulation Authority (SRA) rules requiring law firms to submit annual accountants’ reports whether they are qualified or not, or face fixed financial penalties.
It also told the SRA to continue with work that would allow accountants to deliver their reports directly.
Rule changes have to be signed off by the oversight regulator, which said in its decision notice that the SRA was planning a phased implementation from January 2027 for the changes to compliance roles, with the larger firms complying first.
Around 99% of client money should be covered by April 2027.
The changes were strongly opposed by both the Law Society and the Sole Practitioners Group, concerned about the impact on small firms.
The SRA launched a consultation on the changes last December, designed to help it spot risks to law firms sooner and intervene earlier in the wake of high-profile firm failures like Axiom Ince.
After analysing the feedback, the regulator said in June that it was raising the financial thresholds to exempt more small law firms from some of the changes.
The maximum annual turnover for exemption remained at £600,000 but the maximum client money total was increased from £500,000 to £2m. In sole owner-manager firms which operate beneath the thresholds, the sole owner-manager can be the COLP but not the COFA.
The LSB said the SRA now estimated that around 1,660 firms (18% of all firms) and 431 sole owner-manager firms may need to take action to comply with the new rules, although that estimate was based on “limited information”.
A further exemption would allow small firms to exceed the £2m client money threshold in “anomalous transactions”, which were “not representative of, or anticipated as part of, the authorised body’s usual or expected business activities”.
The LSB said it expected the regulator to publish guidance and case studies on this before the exemption took effect.
Meanwhile, the new rules on accountants’ reports will apply from April 2027.
Following the consultation, the SRA dropped a proposal that accountants should submit their reports directly to the regulator.
The LSB said that – like the Legal Services Consumer Panel – it saw “significant consumer benefits” in allowing accountants to do this.
The SRA explained in response that it still considered there to be “merit” in the idea but the consultation responses showed that work was needed to address “issues of liability, accountability and the practical implications of the model before it could be introduced”.
Further, it said it wanted to ensure there was “sector readiness for direct submission to operate effectively in practice before introducing such a change”.
The LSB said it was “important” for the SRA to get on with this and that it expected updates on progress.
The oversight regulator concluded: “The LSB welcomes the overall direction of the proposals, recognising their potential to strengthen consumer protections and deliver public benefit, as well as the opportunity to strengthen transparency and oversight.
“Our focus has also been on the proportionality of the proposals and the ability of firms to effectively implement them.”
The SRA had explained that “it was unclear whether firms would pass any associated costs on to consumers but that this was not always a given in a competitive market”.
The LSB went on: “We note a potential risk that any increased compliance costs may be passed on to consumers through higher prices, which may impact access to justice for some consumers.
“We expect the SRA to monitor and evaluate the impact of the proposed changes on firms and consumers, to keep those impacts under review, and to report to the LSB any significant concerns regarding a reduction in access to justice.”
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