This month, the Solicitors Regulation Authority (SRA) has launched yet another consultation aimed at bolstering protections for client money held by solicitors – “Further consultation on client money in legal services: Protecting the client money that solicitors hold” (https://www.sra.org.uk/sra/consultations/consultation-listing/legal-services-client-money/) . This follows on from the SRA’s previous failed attempts to abolish client account. The SRA’s latest consultation is significant. Not only does it combine proposed rule changes with the same old question as to whether the traditional model of solicitors holding client money remains fit for purpose in today’s legal services market but also it questions the SRA’s approach to funding its compensation scheme, and whether this remains fit for purpose.
Handling Client Money
The handling of client money lies at the very heart of the relationship between clients and solicitors. These are obligations embedded in the SRA Accounts Rules and the SRA Code of Conduct and are aimed at safeguarding the interests of consumers and maintaining confidence in legal services.
Yet despite the generally high standards of compliance across the profession, recent years have seen high-profile failures and systemic concerns that have prompted regulatory attention. The collapse of the law firm Axiom Ince, in which tens of millions of pounds of client funds were alleged to have been misappropriated, remains a stark reminder of what can go wrong when systems and controls fail. Although the outcomes of related prosecutions and inquiries continue to unfold, the regulatory response has been to look closely at whether the existing model of client money regulation and oversight is sufficiently robust — not only in law, but in practice.
The latest regulatory push in relation to the handling of client money is inevitably shaped by the sharper focus on governance that followed Axiom Ince. Situations where a single senior individual combines day-to-day control of the business with key compliance roles, is inevitably one that is open to abuse by reducing meaningful internal challenge. It is against that background, that the SRA is signalling that it expects firms to build “checks and balances” into the COLP/COFA model, rather than treating compliance appointments as a paper exercise.
Consumer Protection and Confidence
The SRA’s December 2025 consultation continues its examination of how client funds should be handled, protected, and, if lost, compensated.
A fundamental aim of this process has been to ensure that the regulatory framework remains effective in safeguarding consumer funds while supporting a competitive and dynamic market for legal services. Solicitors and law firms hold client money in the course of regulated activity for a wide range of matters — conveyancing, litigation, probate and estate administration, to name a few. For many clients such money represents significant personal or commercial value. Loss, theft, or misapplication of client money can have serious consequences, both for those directly affected and for public trust in the profession.
However, whilst there are opportunities for misapplication of client funds, nevertheless the vast majority of firms manage client funds responsibly, and placing increased burdens upon firms generally will simply have the effect of yet further increasing the costs of regulation simply to protect against the bad apples.
Previous consultations canvassed three broad areas: the way solicitors hold client money, how client funds are protected and safeguarded while in a firm’s custody, and the role of the SRA’s Compensation Fund in providing redress when money is lost. The latest consultation published on 11 December 2025 builds on that foundation and proposes more detailed changes to the existing regulatory regime.
The Focus of the Latest Consultation
This consultation has two primary strands:
- enhancements to the processes and requirements for accountants’ reports, and
- reforms to the roles and checks associated with compliance officers.
Additionally, the SRA has indicated it will give further consideration to the longer-term questions about the overall model of client money holding and the sustainability of the Compensation Fund.
Accountants’ reports have long been a feature of the SRA’s oversight of client money. Under the Accounts Rules, firms that hold client money must have periodic reports prepared by independent accountants, which help to identify weakness in systems and controls and provide assurance that accounts and records comply with regulatory requirements. However, the SRA’s own spot checks and reviews have revealed significant shortfalls in compliance with the existing regime. The result, as the regulator sees it, is that it lacks consistent, high-quality data that can underpin effective risk-based supervision.
In response, the SRA’s proposals include introducing a mandatory annual declaration for all firms holding client money, enhancing the data received by requiring submission of all accountants’ reports whether qualified or unqualified, and having those reports supplied directly by reporting accountants rather than via the firms themselves. There is also the potential for fixed financial penalties for late or incomplete declarations intended to strengthen the SRA’s early warning capabilities and provide better insights into emerging risks.
The SRA says it has evidence of worrying slippage in basic compliance with the existing accountants’ report regime. In one recent spot check, it appeared that a number of non-exempt firms had not obtained their most recent report at all, and others only secured it after the six-month deadline had passed.
The other important focus is the role of compliance officers — typically Compliance Officer for Finance and Administration (COFA) and Compliance Officer for Legal Practice (COLP) — and how firms allocate these responsibilities, particularly in smaller practices. The SRA has identified situations where a single individual in a firm may occupy multiple compliance roles while also having significant operational control, potentially diluting the very checks and balances that these regulatory roles are designed to deliver.
More specifically, the consultation is framed as a “crackdown” on the way COLP and COFA responsibilities are allocated in practice. The aim is to prevent these roles from being held by people who can unilaterally determine, or direct, significant management decisions in the firm and to widen the concept beyond narrow ‘client money’ decision-making to cover those occupying influential positions generally. There will be exemptions designed to address smaller practices, including carve-outs tied to turnover and client-balance thresholds, and a limited exception in which a sole owner-manager may still act as COLP in certain circumstances even where a separation from the COFA role is expected.
The consultation proposes refined thresholds and risk-based criteria that would encourage sensible separation of duties where the scale or risk profile of a firm warrants it, while recognising the practical realities facing sole practitioners and smaller firms. Exemptions and transitional arrangements will be put in place to ensure that changes are proportionate and achievable, and importantly do not unduly burden firms that present lower risk.
Alongside these more immediate proposals, the SRA is considering how to deal with risks relating to firms undergoing significant changes — such as mergers, sales, or rapid growth — which might increase the potential for client money vulnerabilities. This aspect is not yet a formal proposal in the current consultation, but the SRA has indicated that further detailed thinking and future consultation is intended. The SRA links these changes to an increase in large firm failures and to harms that can arise when firms grow beyond their competence or fail to integrate systems and processes properly. It is also intended to address more hostile scenarios, including allegations of bad-faith actors acquiring firms with the intention of exploiting or defrauding client accounts, and suggests it will develop risk indicators that could trigger additional regulatory scrutiny during such transactions.
Continuing Questions: The Model of Client Money and Compensation
Perhaps the most far-reaching aspects of the ongoing review — though not fully addressed in the December 2025 consultation — continues to be whether the traditional model of solicitors holding client money remains the most effective way to protect consumers, and how the system of compensation should function if client money is lost. Earlier consultations canvassed a wide range of possibilities, from maintaining the status quo with enhanced protections, to adopting third-party managed accounts (TPMAs), escrow-like arrangements, or even models where firms do not hold client money at all.
In some jurisdictions, regulators have explored alternative approaches to client funds. For example, systems that channel client money into accounts managed by independent financial institutions under strict controls, or that dispense with client money holding by legal professionals altogether for certain types of transaction. While such alternatives may offer theoretical advantages in terms of risk isolation, they also confront practical, market and legal challenges. The SRA’s own research has not identified a straightforward, directly transferable model that could be adopted wholesale in England and Wales, but it has highlighted potential elements worth further exploration.
The role of the SRA’s Compensation Fund is also under review. Questions have been raised about the sustainability of the Fund, how claims should be processed, and how the cost of maintaining this safety net should be apportioned across the profession. These are complex, policy-laden issues that involve not only regulatory and professional considerations but also consumer expectations and financial realities. It is clear that the SRA intends to return to these topics once the current consultation areas have been addressed, signalling that the present round of proposals is part of a long-term programme of reform rather than a single regulatory tweak.
Responding to the Consultation and Looking Ahead
The consultation launched on 11 December 2025 and runs for ten weeks, closing on 20 February 2026. During this period the SRA has scheduled a range of engagement events and opportunities for practitioners, accountants and consumer representatives to contribute their views. Once the consultation period ends, the SRA Board will review all feedback before deciding on the final form of any rule amendments or new regulatory initiatives. If changes to the Accounts Rules or other regulatory instruments are proposed, these will require approval from the Legal Services Board.
The consultation narrative also sits alongside some “settled” positions the SRA says it has reached following earlier stages of engagement. In particular, it indicates it does not currently intend to impose a standard cap on taking money on account of costs at the outset of a matter, and it is not proposing to replace the flexible concept of returning residual balances “promptly” with a fixed timeframe. It does, however, signal a tightening of the Accounts Rules position on transfers from client to office account for costs, by expecting a bill or written notification of costs before a costs transfer is made, while treating reimbursements of client expenses differently. The SRA state in the consultation that changes to the Accounts Rules will be made “to 2.1(d) to provide that firms can only transfer client money to the office account once a bill or written notification has been produced for costs incurred. And changes to 4.3, 4.3(a) and 4.3(c) and the addition of rule 4.4 as originally consulted on in December 2022 and then again in the November 2024 client money consultation. These changes will make clear that firms do not need to deliver a bill or written notification before reimbursing themselves where it relates to expenses incurred on behalf of the client”.
Many of the proposed changes have direct practical implications for how firms organise their internal controls, report on their compliance, and prepare for external scrutiny.
Ultimately, the SRA’s proposals reflect a regulator grappling with how to safeguard consumer funds in an increasingly complex market for legal services. They reaffirm the fundamental principle that client money must be protected, accounted for, and insulated from misuse, while seeking to modernise the supervisory tools available to the regulator. The debates now underway are about more than technical adjustments to regulatory rules; they speak to the evolving relationship between legal professionals, their clients, and the public interest in a trustworthy, resilient legal services sector.