The Solicitors Regulation Authority has this week acted to ease the concerns of small firm owners about new rules governing the separation of compliance roles.
Dissent has been mounting across the profession since oversight regulator the Legal Services Board confirmed that it had approved changes requiring that different individuals within firms take on compliance officer roles.
The SRA acknowledges that it was unclear what the rules would mean in practice. The original rule, published last December, seemed to suggest that, for firms within scope, no senior manager could be a compliance officer.
Among those raising concerns was Jade Gani, founder and chief executive of boutique firm Circe Law, who warned that without a change in SRA policy, some firms would be forced to close.
Gani, a member of the Law Society’s wills and equity committee, told the Gazette: ‘A turnover of £600,000 simply does not make a law firm large or organisationally complex. Many successful specialist practices with only a handful of people will exceed that figure, while firms working in areas such as probate, conveyancing and Court of Protection can also cross financial thresholds simply because of the nature of the work they undertake.
‘We are particularly concerned about the practical consequences for small firms where the owners or directors are also the people with the greatest knowledge of the firm’s finances, systems and regulatory obligations. Requiring those individuals to relinquish compliance roles may mean appointing or outsourcing the function to someone with considerably less knowledge of the business. It should not simply be assumed that this creates better oversight or reduces risk.’
The Law Society had previously described the proposed separation of compliance roles as complex and impractical. ‘If implemented, there are serious concerns the proposals would likely have a negative impact on small to medium-sized firms in terms of higher regulatory costs,’ it commented earlier this year. These would be passed on to clients and have a ‘knock-on impact on consumers’ access to justice’. Instead, Chancery Lane said the SRA should focus on gathering data to highlight and manage risk better.
'We are particularly concerned about the practical consequences for small firms where the owners or directors are also the people with the greatest knowledge of the firm’s finances, systems and regulatory obligations'
Jade Gani, Circe Law
The SRA has now taken heed. The wording has been updated to make clear the rule will apply only to an individual who can unilaterally make significant management decisions – not to every senior manager or owner. Significant management decisions include important issues such as how the firm is structured and run, how it is governed or manages risk, or how it holds client funds.
Effectively, this means that owners or managers with sole control will not be able to appoint themselves as compliance officer – as has happened in some firms where client money has gone missing. But leeway is available for firms where management is spread.
Aileen Armstrong, SRA executive director for strategy and policy, said: ‘The rules do not necessarily mean firms need to recruit new staff or appoint external providers; what matters is whether they can maintain appropriate separation of responsibility and effective oversight. For example, if your firm already has a decision-making structure based on shared responsibility, then in many cases further change won’t be necessary. And if changes are necessary, firms can determine what works in their circumstances.’
The SRA sees compliance officer roles as an important safeguard for protecting client money and making sure breaches do not go undetected or unreported. The rule change is designed to reduce this risk by making sure responsibility for running the business and overseeing compliance does not sit with one person.
Under the new approach, separation will apply to firms with a turnover of more than £600,000, or to firms that hold more than £2m in client money. The client money threshold was increased in response to consultation feedback.
Sole owner-manager firms that trigger the client money threshold only need to separate out the COFA but not the COLP, while there is an exemption for firms that meet the client money threshold for an exceptional reason in one year.
Guidance will be published this autumn. The SRA said it is working with the national and regional law societies as well as other interest groups to advise on practical steps that firms can take. The rule changes will be phased in from early 2027.
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