Rising AML breaches, complaints, and investigations signal increasing scrutiny of law firms
Law firms are facing growing regulatory scrutiny in 2026 as enforcement activity, compliance failures and complaints across the legal sector continue to rise.
The Solicitors Regulation Authority (SRA) has begun the year dealing with a series of high-profile issues affecting law firms, including unexpected firm closures and regulatory interventions. One of the most significant developments was the sudden collapse of PM Law Ltd in February 2026, which required intervention measures to protect clients and manage the impact on ongoing legal matters.
The regulator has also faced scrutiny itself. The Legal Services Board (LSB) recently issued a formal censure against the SRA over its handling of the collapse of SSB Law. The sanction is only the second time the oversight regulator has formally censured a frontline legal regulator.
Anti-money laundering (AML) compliance has emerged as another key area of concern. According to the SRA’s most recent report, almost one-third of firms inspected were found to be non-compliant with AML requirements, while more than half were assessed as only partially compliant.
The regulator identified several recurring weaknesses across firms. These included inadequate client and matter risk assessments, inconsistent checks on the source of funds, and internal AML policies that appeared robust in documentation but were not effectively implemented in practice.
As a result, the SRA has increased the number of AML investigations and enforcement actions. Firms operating in areas considered higher risk, such as conveyancing, remain under particular scrutiny.
Regulatory attention has also focused on the consumer claims sector. The SRA has worked alongside the Financial Conduct Authority (FCA) to warn firms handling motor finance commission claims to strengthen procedures. Regulators are concerned that some clients may be represented by multiple firms simultaneously or charged unreasonable termination fees when switching legal representatives.
Complaints against law firms have also increased. Data published by the Legal Ombudsman shows an eight per cent year-on-year rise in new complaints accepted for investigation.
Among cases investigated by the Ombudsman, poor service findings were recorded in 70 per cent of decisions, while poor complaint handling was identified in 49 per cent. The organisation has also highlighted delays linked to third parties as a common issue, although it emphasised that firms remain responsible for keeping clients informed and managing expectations throughout legal matters.
Meanwhile, the Ministry of Justice has opened a consultation on a proposed Interest on Lawyers’ Client Accounts Scheme. The proposal would divert a portion of interest earned on client accounts to the government, which could have financial and operational implications for law firms if implemented.
Taken together, the developments point to a year of heightened regulatory oversight for the legal sector, with firms expected to strengthen compliance processes, improve communication with clients, and ensure internal systems meet regulatory standards.