Accounts: All firms will have to submit reports to SRA
The Solicitors Regulation Authority (SRA) is going ahead with rule changes to separate law firm managers who can “unilaterally” make decisions from compliance officer roles in all but the smallest firms.
The move was strongly opposed by the Law Society and Sole Practitioners Group (SPG).
The SRA is also pressing ahead with requiring law firms to submit annual accountants’ reports, whether they are qualified or not, or face fixed financial penalties.
The regulator launched a consultation on the measures [1] last December, designed “to help spot emerging risks sooner and where necessary intervene earlier”, in the wake of high-profile firm failures such as Axiom Ince.
It 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.
In response, the Law Society argued [2] that separating the COLP and COFA roles would increase regulatory costs, particularly for smaller firms, and reduce access to justice.
The SPG said it was concerned that the plans were “unworkable and discriminatory”.
In its consultation report, published today, the SRA said it had decided to raise the client money threshold to £2m.
This would cover 99% of all client money held but reduce the number of small firms in scope from 1,302 to 576.
Law firms with “anomalous transactions which are not representative of the firm’s usual or expected business activities” could apply to the regulator for an exemption.
As originally proposed, in sole owner-manager firms which operate beneath the thresholds, the sole owner-manager could be the COLP but not the COFA.
Under the new rules for accountants’ reports, which “most respondents” to the consultation agreed with, mandatory annual declarations will also be introduced, confirming key details such as the accounting period, the details of the instructed reporting accountant or whether the firm considers itself exempt from the requirement to obtain a report (existing exemptions will continue to apply).
Fixed financial penalties will be introduced for law firms which fail to submit reports and declarations, a measure again supported by most respondents.
However, the SRA dropped a proposal that accountants should submit their reports directly to the regulator, an idea opposed “by a substantial minority”. The Law Society argued that law firms could be fined for the lateness of their accountants.
A “significant minority” also opposed a plan for new SRA guidance to ensure that accountants routinely sought bank confirmations to verify the list of client accounts.
Some respondents “noted that bank confirmation processes can be slow or inconsistent, creating delays in completing accountants’ reports”.
The SRA said it would make it clear “as now” that reporting accountants should “take a view of the circumstances as a whole”, but bank confirmations were “commonly used”.
The regulator added that the proposed rule changes were subject to approval by the Legal Services Board. If that was forthcoming, the new rules would come into force in early 2027.
Sarah Rapson, chief executive of the SRA, commented: “We are taking a broader look at whether firms should continue to hold client money in the way they do today.
“In the meantime, these reforms are an important step to mitigate risks within the current framework. We must build a more flexible and responsive framework, if we are to act quickly where risks emerge.”
In a separate development, the SRA has been designated as a prescribed person under the Public Interest Disclosure Act 1998.
The Act protects anyone working for or with an SRA-regulated individual or firm – whether they are lawyers, law firm staff or agency workers – in making a report to the regulator where they ‘reasonably believe’ they are acting in the public interest.
Aileen Armstrong, SRA executive director for strategy and innovation, said the designation was “an important step in making sure anyone working within a law firm, not just a solicitor, feels safe and able to bring forward their concerns”.
Andrew Pepper-Parsons, director of policy and communications at whistleblowing charity Protect, added: “The annual reports from the SRA that come with being prescribed will add transparency and accountability to the whistleblowing function.”