Law firm owners including sole practitioners are continuing to fight rule changes which will force them to separate management and compliance roles.
The Legal Services Board last week approved proposals from the Solicitors Regulation Authority barring firms operating above a certain level from having managers act as COLPs or COFAs.
The rule applies to firms that have annual turnover of at least £600,000 and/or firms which hold at least £2m in client money. Further partial exemptions are in place: in sole practitioner firms, managers can also hold the COLP role, while the rules will not apply to firms which exceed the client money threshold because of anomalous transactions.
The SRA is working on implementing the changes in phases over the next two years. But there remains a groundswell of opposition which argues that the changes will do little to prevent client money being misappropriated and could place unsustainable burdens on firms who narrowly miss out on the exemptions.
Jade Gani, founder and chief executive of boutique firm Circe Law, said discussions are under way among firm owners to urge the SRA to think again.
Gani, a member of the Law Society’s wills and equity committee, told a Linkedin Live webinar hosted by compliance adviser HiveRisk this week that owners were not asking for less regulation, just workable measures that were appropriate. She warned that without a change in SRA policy, some firms would be forced to close.
Gani 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 SRA has said it wants to address the specific risk of management, ownership and compliance positions all falling on one individual. This has been prompted by recent law firm collapses where large amounts of client money has gone missing and owners have also had compliance officer roles.
The regulator believes there is a ‘clear risk’ if a firm is run by a single individual without the checks and balances that a separate COLP and COFA could provide.
‘If an individual who has power within a firm, controlling its decision-making and actions, is also the COLP or COFA, this may negate that key safeguard,’ the SRA said in its consultation. ‘This may in turn increase the risk of serious breaches of our regulatory arrangements and these breaches going undetected and unreported, causing significant harm to consumers and the public.’
Gani said that the rule changes do not get to the core issues of funds leaving the client account. She pointed out that owners minded to steal client money would simply appoint a COLP and COFA who they could collude with or manipulate.
She added: ‘The profession should be asking whether separating these roles would realistically have prevented the catastrophic failures which prompted these reforms, and whether more targeted measures, including better regulatory use of financial information and earlier intervention, would provide stronger protection for clients.’
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