The SRA has confirmed that it will move forward with significant reforms aimed at strengthening protections around client money and improving accountability within law firms, despite strong opposition from the Law Society and representatives of smaller practices.
The proposed changes, which are expected to come into force following approval from the Legal Services Board (LSB), represent one of the most significant shifts in law firm governance since the introduction of the Compliance Officer for Legal Practice (COLP) and Compliance Officer for Finance and Administration (COFA) regime.
For many firms, particularly those handling substantial client funds, the reforms will require structural changes to compliance arrangements, increased reporting obligations, and greater scrutiny of internal controls.
Why now?
The reforms come against the backdrop of several high-profile law firm failures, including Axiom Ince, SSB Law and PM Law, which exposed weaknesses in oversight arrangements and raised concerns about the protection of client money.
The SRA has made clear that safeguarding client funds remains one of its top regulatory priorities. The regulator believes that stronger checks and balances are needed to identify emerging risks earlier and prevent governance failures before they result in consumer harm.
SRA Chief Executive Sarah Rapson said the changes are designed to strengthen accountability within firms and improve the regulator’s ability to identify risks before problems escalate. She also indicated that the SRA is undertaking a broader review of whether law firms should continue to hold client money under the current model at all.
That wider review could have even more profound implications for the profession in the years ahead.
Separation of management and compliance roles
The most controversial element of the reforms is the requirement for certain firms to separate management and compliance responsibilities.
Under the new framework, firms with annual turnover exceeding £600,000 or holding more than £2 million in client money will no longer be permitted to have individuals who exercise significant management control also serve as COLP or COFA.
The SRA’s rationale is that those responsible for running a firm should not simultaneously be responsible for independently overseeing compliance within that same firm.
According to the regulator, separating these functions creates a stronger system of internal challenge and reduces the risk that compliance concerns could be overlooked, suppressed, or inadequately investigated.
The final rules are less extensive than originally proposed. Following consultation feedback, the SRA increased the client money threshold from £500,000 to £2 million, significantly reducing the number of smaller firms affected by the changes.
The regulator estimates that the revised threshold still captures approximately 99% of client money held by firms while reducing the number of smaller practices that fall within scope.
Nevertheless, the £600,000 turnover threshold remains unchanged, a decision that has drawn criticism from the Law Society.
What this means for law firms
For many firms, especially owner-managed practices, the reforms will require a reassessment of governance structures.
Firms that currently rely on a managing partner, director, or owner to perform both leadership and compliance functions may need to appoint separate COLP and COFA officers. In some cases, this could necessitate recruiting additional personnel, redistributing responsibilities among senior staff, or introducing new reporting lines.
The practical impact will vary depending on firm size and complexity.
Larger firms may already have sufficient resources and personnel to separate these functions with relatively limited disruption. Smaller and medium-sized firms, however, may face increased operational costs and challenges in finding appropriately qualified individuals to assume compliance roles.
The SRA has recognised some of these concerns by retaining partial exemptions for smaller sole owner-manager firms where practical constraints make full separation difficult.
However, many firms that sit just above the turnover threshold may still find themselves caught between the regulator’s expectations and commercial realities.
Annual accountants’ reports to face more scrutiny
The second major reform focuses on strengthening oversight of client accounts.
Under the new regime, all firms that hold client money will be required to submit annual accountants’ reports directly to the SRA’s reporting framework, regardless of whether those reports are qualified.
Firms will also need to complete annual declarations confirming key information, including accounting periods, reporting accountant details, and whether they qualify for any exemptions.
The SRA believes these changes will provide greater visibility into firms’ financial controls and help identify risks much earlier than under the current system. Firms that fail to submit reports or declarations on time will face fixed financial penalties.
While many consultation respondents supported stronger reporting requirements, concerns were raised about the administrative burden involved and the potential for firms to be penalised due to delays outside their control, such as issues arising during the accountants’ reporting process.
The SRA ultimately decided not to proceed with a proposal that would have required accountants to submit reports directly to the regulator.
A regulatory focus on individual accountability
The SRA increasingly appears focused not only on firm-wide systems and controls but also on identifying who within an organisation bears responsibility when governance failures occur.
This trend mirrors developments seen across other regulated sectors, including financial services, where regulators have sought to strengthen individual accountability for risk management and compliance oversight.
The SRA has already indicated that it is considering whether senior individuals should bear clearer personal responsibility for protecting client money and managing associated risks.
The Law Society has consistently argued that the proposals risk creating significant challenges for smaller firms without necessarily improving compliance outcomes.
The Society also warned that separating compliance functions in smaller firms may prove ineffective because owner-managers often retain practical control regardless of who formally occupies the COLP or COFA positions.
There are also concerns about increased compliance costs, potential impacts on access to justice, and disproportionate effects on smaller practices, legal aid providers, community-based firms, and solicitors from minority ethnic backgrounds, who are overrepresented in the small-firm sector.
The Legal Services Board will now need to consider these concerns before granting final approval.
Whistleblowing protections expanded
Alongside the governance reforms, the SRA has also been designated as a prescribed person under the Public Interest Disclosure Act 1998.
This means that anyone working for or with an SRA-regulated firm, including non-lawyer employees, contractors, consultants, and agency workers, can make protected disclosures directly to the regulator where they reasonably believe they are acting in the public interest.
The change is intended to strengthen whistleblowing protections and encourage earlier reporting of misconduct or compliance concerns.
For firms, this serves as another reminder of the importance of fostering a strong speak-up culture and ensuring that internal reporting mechanisms are trusted and effective.
What should firms do now?
Although the reforms are not expected to take effect until early 2027, firms should begin assessing their exposure now.
Governance structures, compliance officer appointments, client money arrangements, and reporting processes should all be reviewed against the proposed requirements.
Firms approaching the turnover threshold or regularly holding substantial client balances may need to consider succession planning, role redesign, or additional compliance resources well before implementation.
Perhaps most importantly, firms should prepare for a regulatory environment in which governance, accountability, and client money protection are subject to increasing scrutiny.
