SRA’s new proposals include mandatory annual declarations, fixed penalties for late filings, and enhanced oversight of firms undergoing significant changes
The Solicitors Regulation Authority (SRA) has announced new proposals to strengthen the protection of client money, including a requirement for law firms to submit all accountants’ reports, both qualified and unqualified, to the regulator. Firms will also face fixed penalties if they fail to file a mandatory annual declaration confirming compliance with client money rules.
The move is part of the SRA’s ongoing review to enhance consumer protection following several high-profile law firm failures. The regulator’s latest proposals are designed to improve oversight of firms handling client funds, which have been the subject of increasing concern in recent years.
Since 2014, firms have only been required to submit qualified accountants’ reports, following a relaxation of previous rules. However, a recent SRA spot-check of 596 firms revealed concerning non-compliance, with 25 non-exempt firms failing to obtain an accountant’s report for their last reporting period and another 31 submitting reports late. These findings have led the SRA to propose the reintroduction of mandatory submission of both qualified and unqualified accountants’ reports to help identify firms at risk of mishandling client money.
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The SRA emphasised that the information provided in accountants’ reports is crucial for identifying potential risks and enabling early intervention. In addition to requiring firms to submit all reports, the proposals also include the introduction of a mandatory annual declaration confirming compliance with the SRA’s client money rules. Financial penalties will be imposed on firms that submit late or incomplete declarations, with the aim of driving greater compliance.
Further proposals in the consultation address the issue of firms with a single individual holding significant power and control, particularly in smaller firms. The SRA is proposing that in firms with a turnover exceeding £600,000, the same person should not be allowed to occupy both the role of Compliance Officer for Legal Practice (COLP) and Compliance Officer for Finance and Administration (COFA), to avoid conflicts of interest and ensure proper oversight. This proposal will apply to approximately 3,525 firms in the UK, many of which hold large client money balances.
The SRA also expressed concerns about firms that grow beyond their capacity and competence, particularly those involved in multiple acquisitions. The regulator plans to implement more timely and comprehensive information collection from such firms to better identify and target risks. A consultation on these additional measures will be published next year.
Aileen Armstrong, the SRA’s executive director for strategy, innovation, and external affairs, highlighted the need for these changes, stating, “While the vast majority of firms act responsibly, we have seen cases where client money has been lost, which underscores the importance of further action to strengthen safeguards for clients and their money.”
In the longer term, the SRA also intends to explore whether the current model for solicitors holding client money and its approach to funding the compensation scheme remain fit for purpose.