Law firms will once again be required to submit all accountants’ reports to the regulator under plans published today to better protect client money. Firms will also incur fixed penalties if they fail to file a mandatory annual declaration that they are compliant.

As part of its ongoing review of consumer protection, the Solicitors Regulation Authority is consulting on further proposals to strengthen protections for the money clients deposit with law firms. Today’s plans encompass its approach to accountants’ reports, and the division of the COLP and COFA roles.

In the wake of a string of spectacular failures, the regulator has also given notice of plans to enhance its oversight of firms that change their profile significantly through sales, mergers or acquisitions.

Since 2014, when the rule was relaxed, firms have only been required to submit qualified accountants’ reports to the regulator. However, a recent spot-check identified significant non-compliance. Of 596 firms surveyed by the SRA, 25  non-exempt firms had not obtained an accountant’s report for their last reporting period. Another 31 were late.

‘The information provided in accountants’ reports can help to identify firms that are placing client money at risk, allowing the regulator to take appropriate action,’ the SRA said. ‘The proposals in the latest consultation are designed to enhance oversight without placing unnecessary burden on firms.’

The proposals include:

  • introduction of a mandatory annual declaration that all firms must complete, to provide a record of compliance;
  • a requirement to submit all accountants’ reports, both qualified and unqualified, providing the SRA with improved data, which will allow the SRA to ‘tailor its future approach to data collection’;
  • a requirement that reporting accountants submit reports directly to the SRA ; and
  • fixed financial penalties for firms that submit late or provide incomplete declarations, ‘to drive compliance’.

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Today’s consultation also addresses risks relating to a single individual with significant power and control in a firm also occupying the key compliance roles. In firms that meet specified risk thresholds, it proposes that any individual who can unilaterally determine or direct significant management decisions cannot be the COLP or COFA. Unlike a similar proposal in a previous consultation, however, the requirement will not be limited to decisions involving client money. A partial exemption would apply to sole owner-manager firms.

The requirement to restrict unilateral decision-makers from occupying the COLP and COFA roles will apply to firms with turnover exceeding £600,000 (nearly 40% of the total). Some 3,525 firms fell into this category in 2024-25 and they represented high client money balances, the SRA stresses. Larger firms also accounted for the highest-value claims to the compensation fund.

Today’s consultation also alludes to the recent rise in large firm failures and harms arising from firms ‘growing beyond their competence, capacity or capability’. Respondents to a previous consulation backed greater oversight of firms significantly changing their profile - including serial acquirers.

Proposals on ‘additional, more timely’ information that the SRA will require from such firms to enable the regulator to 'better spot and target risks' will be published next year.

Aileen Armstrong, the SRA’s executive director - strategy, innovation and external affairs - said: ‘We know that the vast majority of firms act responsibly. At the same time, we have seen issues in the market, as well as cases where client money has been lost, which highlight that we all need to take further action to strengthen the safeguards for clients and their money.’

Beyond the reforms proposed today, the SRA pledged to explore ‘fundamental long-term questions about whether the current model of solicitors holding client money, and its approach to funding the compensation scheme, remain fit for purpose.’