Law Society: Proposals unlikely to have intended effect
Preventing the owners of law firms from being compliance officers could lead to “additional regulatory expenses” which will be passed onto clients, the Law Society has warned.
The society said the restrictions put forward by the Solicitors Regulation Authority (SRA) could have “unintended and disproportionate consequences” for small to medium-sized firms.
In a consultation published in December [1], the SRA proposed that where firms have an annual turnover of more than £600,000 and/or a maximum balance of £500,000 in client money at any point in the most recent accounting period, any individual who can ‘unilaterally determine or direct significant management decisions’ cannot be the COLP or COFA.
The SRA is also proposing that sole owner-managers of firms that just meet the criterion of holding client funds of over £500,000 can be the COLP but not the COFA too.
The idea is to address the risk of management, ownership and compliance roles being concentrated in one individual, as was the case with Axiom Ince.
The Law Society described the proposed separation of compliance roles as “complex, impractical and unlikely to prevent the perceived risk the SRA is trying to fix”.
If the SRA took “a hard line on thresholds”, there might be “unintended and disproportionate consequences” for consumers and SME firms.
“Firms would have little option but to contract out these roles to others or pay existing staff more to take on the extra responsibility of such roles.
“Additional regulatory expenses for firms are likely to be passed onto clients. More clients unable to afford the costs of legal services would have an impact on access to justice.”
On sole owner-managers, the society said: “Should this proposal be implemented, it could lead to a significant reduction in numbers of sole practitioners.
“Sole practitioners should not face adverse consequences because of the vastly different problems identified by Axiom Ince.”
Many of the proposals risked disproportionately affecting Black, Asian and minority ethnic solicitors – who predominantly work in smaller firms in less profitable areas – as well as legal aid and sole practitioners, the response argued.
The society supported SRA plans to bring back the “historical safeguard” that requires firms holding client money to submit an annual accountant’s report.
However, it opposed the introduction of fixed financial penalties for law firms which failed to comply, as this “may create unintended risk or delay and could unfairly penalise firms for failures outside their control”.
A “more effective way” to ensure compliance would be “to emphasise the likelihood of the SRA issuing a written rebuke”.