Introduction
The SRA has announced a significant package of reforms intended to strengthen the protection of client money and improve its oversight of firms that hold client funds. Although the changes remain subject to approval by the Legal Services Board, the SRA expects the new rules to come into force by early next year. Firms should therefore start assessing now how the proposals will affect their governance arrangements, accountants’ report processes and compliance officer appointments.
The announcement follows the SRA’s consultation on client money, which ran between December 2025 and February 2026. The SRA has been reviewing whether the current model, under which many law firms routinely hold client money, continues to provide adequate protection for consumers. That wider question remains under consideration. In the meantime, the SRA is pressing ahead with reforms which it says are designed to strengthen oversight and accountability within the existing framework.
Two Immediate Areas of Change
The immediate changes focus on two main areas. The first is the accountants’ reports regime. The second is the separation of compliance roles from individuals who have significant decision-making power in higher-risk firms. Both changes are important because they indicate a clear shift in the SRA’s regulatory posture. The SRA is moving away from reliance on firms simply having systems in place and towards a more proactive model in which it receives more information, at an earlier stage, about potential risks to client money.
Accountants’ Reports: Greater Visibility for the SRA
At present, firms that hold client money are generally required to obtain an accountant’s report unless an exemption applies. However, only qualified reports have had to be submitted to the SRA. This has meant that the SRA has not had a complete picture of whether firms have obtained reports when required, whether reports have been produced on time, or whether firms have incorrectly treated themselves as exempt. The SRA has expressed concern that this lack of visibility may prevent it from identifying risks at an early stage.
Under the new rules, all firms that hold client money will be required to submit annual accountants’ reports to the SRA unless an exemption applies. Firms will also have to provide key information through a declaration. Where a firm considers itself exempt from the requirement to obtain an accountant’s report, it will have to provide information about its exemption status. This is likely to make the accountants’ report process more visible and more auditable.
For many firms, the underlying obligation to obtain an accountant’s report will not be new. What will change is the level of regulatory visibility. Firms will no longer be able to treat an unqualified report as a purely internal compliance document. The SRA will expect to receive information confirming that the report has been obtained, whether it was qualified, and whether the firm is relying on an exemption. This will make failures to obtain reports, late reports and incorrect exemption decisions much easier for the regulator to identify.
Fixed Penalties for Late or Non-Submission
The SRA also intends to extend fixed financial penalties to cover late or non-submission. This is important because it suggests that the accountants’ report process will become a more formal annual compliance event, rather than a back-office requirement dealt with between the firm, the COFA and the reporting accountant. Firms will need to diarise reporting deadlines carefully and make sure that responsibility for instructing accountants, reviewing reports and submitting information to the SRA is clearly allocated.
The practical implications are likely to be particularly significant for smaller firms that have historically taken a relatively informal approach to accounts compliance. It will no longer be enough to assume that an accountant has dealt with matters or that a report is not required. Firms should review whether they fall within the exemption criteria, retain evidence supporting any exemption decision, and make sure that the COFA has an effective system for monitoring the reporting timetable.
Separation of Compliance Roles in Higher-Risk Firms
The second major change concerns the separation of compliance roles. The SRA has announced that higher-risk firms with a turnover of more than £600,000, or holding more than £2 million of client money, will be required to ensure that individuals who can make significant decisions about how the firm is run cannot also act as the firm’s COLP and COFA. The purpose of this change is to reduce the risk that too much control is concentrated in one person, particularly where that individual is also responsible for oversight of the firm’s compliance arrangements.
This is a major governance issue. In many firms, particularly owner-managed firms, senior partners, directors or members often also hold compliance officer roles. That arrangement may have been convenient and may have reflected the reality that the most senior person in the firm has the greatest knowledge of the business. The SRA’s concern is that this can also weaken internal challenge. If the person making key management decisions is also the person responsible for identifying and reporting compliance failures, there is an obvious risk that problems may not be escalated, investigated or reported objectively.
Which Firms Are Likely to Be in Scope?
The new separation requirement will not apply to every firm. The SRA has indicated that it will apply to higher-risk firms by reference to turnover and client money thresholds. There will also be a partial exemption for smaller sole owner-manager firms, recognising the practical difficulty such firms may face in identifying separate individuals to hold compliance roles. However, firms close to the relevant thresholds should not wait for the final implementation date before considering their position.
The first step for firms is to assess whether they are likely to be in scope. They should review their most recent turnover figures and the highest level of client money held. Conveyancing firms, private client firms and firms handling damages, settlements or estate monies will need to pay particular attention to the client money threshold. Even firms with modest turnover may hold substantial client funds at particular points in the year.
Where a firm is likely to fall within the new separation requirement, it should review its current management structure. It will need to identify who has the ability to make significant decisions about how the firm is run, who currently acts as COLP and COFA, and whether those roles will need to be reassigned. This may require careful planning. A compliance officer must have sufficient seniority, authority and access to information to perform the role effectively. Simply appointing a nominal COLP or COFA to satisfy the rules would create further regulatory risk.
Implications for Governance Documents and Succession Planning
The reforms also have implications for succession planning and governance documentation. Firms may need to amend partnership agreements, LLP agreements, company governance documents, office manuals, role descriptions and internal reporting lines. They may also need to update their risk registers to reflect the risk of concentration of control, ineffective compliance oversight and failure to identify client money issues.
COFAs should be particularly alert to the practical consequences. The SRA’s focus on client money means that the COFA role is likely to come under greater scrutiny. Firms should make sure that the COFA receives regular and reliable information about client account reconciliations, residual balances, suspense items, breaches of the Accounts Rules, client-to-office transfers, unpaid disbursements, banking arrangements and any unusual movements on client account. The COFA should also have a clear route to report concerns to the firm’s management body and, where necessary, to the SRA.
Wider Context: Consumer Protection and Client Money Risk
The changes should also be seen in the wider context of the SRA’s concerns about consumer protection, law firm failures and the potential misuse or loss of client money. The SRA has made clear that it is still considering more fundamental questions about whether firms should continue to hold client money in the way they do now. This announcement is therefore unlikely to be the end of the reform process. It is better understood as an interim strengthening of the current system while the SRA considers whether more radical changes are needed in the longer term.
Firms should not treat the announcement as a purely technical change to the Accounts Rules. It is a regulatory warning about governance, control and accountability. The SRA is signalling that client money protection is not just a finance department issue. It is a board-level and owner-level responsibility. Senior managers will be expected to understand how client money is protected, how breaches are identified, how compliance officers are supported, and how independent challenge is built into the firm’s systems.
There are several practical steps firms should now take. They should confirm whether they hold client money and whether they are required to obtain an accountant’s report. They should review whether any exemption from the accountants’ report requirement genuinely applies. They should check that accountants’ reports are obtained within the required timescale and that the firm has a central record of reports, qualifications, management responses and remedial action. They should also review who is responsible for submitting information to the SRA and how deadlines will be monitored.
Practical Steps
Firms should also assess whether they may fall within the new separation requirements. If they do, they should consider whether their COLP and COFA arrangements remain appropriate. Where changes are needed, firms should identify suitable role holders early, provide training, update job descriptions and ensure that the new compliance officers have genuine authority. It will be important to avoid treating the role as an administrative label. The SRA will expect compliance officers to be capable of providing meaningful oversight.
The announcement is also a reminder that accountants’ reports should not be viewed as an annual formality. A qualified report, or a report identifying weaknesses in systems and controls, should lead to documented remedial action. Firms should record what has been found, who is responsible for correcting it, when the work will be completed, and how the firm will check that the issue has been resolved. Where the issue is serious, the firm must also consider whether it has a separate obligation to report to the SRA.
For firms with strong systems, the reforms may not require dramatic operational change. However, they will still require better evidence. The SRA will increasingly expect firms to demonstrate that they understand their client money risks and have taken active steps to manage them. For firms whose arrangements are informal, undocumented or overly dependent on one individual, the changes may be much more significant.
Conclusion: Firms Should Start Preparing Now
The central message for firms is straightforward. Client money compliance is becoming more visible, more structured and more closely linked to governance. Firms should use the period before implementation to review their accounts reporting arrangements, test the independence and effectiveness of their compliance roles, and ensure that senior managers can evidence proper oversight of client money risks.
These reforms should be treated as an opportunity to strengthen internal controls before the new requirements take effect. Firms that wait until the rules are formally in force may find themselves having to make rushed changes to compliance officer appointments, reporting processes and governance arrangements. A planned review now is likely to be far less disruptive than a reactive response later.
