The Solicitors Regulation Authority has postponed the implementation of controversial separation rules for compliance officers in law firms. The regulator has come under heavy criticism for its proposal to prevent firm owners from also acting as compliance officers. The rule has already been approved by the Legal Services Board and was due to be phased in from January, but those plans are now on hold.
Aileen Armstrong, SRA executive director for policy and strategy, said: ‘We appreciate and understand the concerns that have been raised about this rule change, particularly by smaller firms.
'We know that the profession supports our ambition to prevent consumer harm. Our aim, in line with the direction set by the LSB, is to tackle the harms that could arise where there are no checks and balances on individuals taking decisions in firms. Strong firm governance is an important protection in preventing consumer harm. However, we are aware of the risk of unintended consequences, particularly for smaller firms.
‘We are pausing to take stock. Over the coming weeks, we will actively consult with stakeholders on potential options we are developing with a view to making necessary changes to our approach and achieving the objective in a proportionate way.’
The SRA had seen the measure as a key way to prevent the type of collapse seen at the likes of Axiom Ince and PM Law, where a collective £100m in client money has been lost amid questions about the dual roles of management and compliance.
But small firms have said that appointing a separate compliance within the timeframe expected was unmanageable and counterproductive, with little in the reform itself to prevent client money being misappropriated.
The SRA estimates that around 1,660 firms may be impacted, including 431 sole owner-manager firms.
The newly formed SME & Boutique Law Firm Alliance was due to call for a vote of no confidence in the SRA board at next month’s Law Society annual general meeting.
In an open letter to SRA chief executive Sarah Rapson, the group said there was ‘genuine alarm’ among its members, and that faced with significant additional compliance costs, some small firms would conclude they could no longer afford to operate.
The alliance today welcomed the SRA's decision to pause and take stock, and its recognition of the concerns raised, particularly by smaller firms.
A spokesperson said: 'This is an important first step and we welcome the opportunity for meaningful engagement on a proportionate way forward.
'However, the proposed vote of no confidence concerns wider issues of regulatory governance and accountability than just the COLP/COFA proposals alone. We therefore have no plans to withdraw that call at this stage.'
Representatives from the SME & Boutique Law Firm Alliance will meet with the SRA next Monday, and the Law Society and LSB next Thursday.
Following the SRA announcement to pause plans, Law Society president Mark Evans said: ‘Plans to pause the compliance officer measures and consult solicitors with a view to making changes following serious concerns raised by the Law Society and the wider profession demonstrate the SRA’s willingness to listen and act when they have got it wrong. We are encouraged by this fresh level of maturity at the SRA under its new leadership.
‘To ensure these measures benefit the profession, the SRA must make significant changes that reflect the concerns raised by members and by the Law Society in February.’
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