SRA to require all law firms to submit annual accountants' reports

New rules will require all law firms holding client money to submit annual accountants’ reports to the Solicitors Regulation Authority.

The regulator will also require firms to provide key information through a declaration about the money they are holding. Fixed fines will be extended for any firms who are late or non-compliant with these new requirements.

The protection of client money is a long-term issue for the SRA,  magnified in the last two years with combined losses of £100m emerging from the closed firms Axiom Ince and PM Law.

The regulator has made clear such losses – which will partly be met by increased contributions from the profession – are unsustainable, and create the need for measures to prevent similar amounts going missing from client accounts.

With the client account itself likely to come under scrutiny in the long term, these measures are designed to address immediate concerns and strengthen client protection.

As well as new reporting requirements, higher-risk firms with turnover exceeding £600,000, or holding more than £2m of client money, will have to ensure that individuals who can make significant decisions about how the firm is run, cannot also be the compliance officers for legal practice, and finance and administration.

This separation of roles, it is envisaged, will reduce the risk that conflict, or weak internal challenge, will allow problems to go undetected and unreported. A partial exemption will be allowed for smaller sole owner-manager firms, where there are practical constraints to separating out roles.

Sarah Rapson, chief executive of the SRA, said: ‘Protecting client money is one of our most important responsibilities, and developing our ability to proactively identify and address risk is a priority. That is why we are making changes that will help us identify risks earlier, strengthen accountability within firms, and reduce the likelihood of harm to consumers.

‘As we outlined in our draft business plan, we are taking a broader look at whether firms should continue to hold client money in the way they do today. In the meantime, these reforms are an important step to mitigate risks within the current framework. We must build a more flexible and responsive framework, if we are to act quickly where risks emerge.’

Accountants' reports for non-exempt firms must in future be submitted whether they are qualified or not. In 2014, the SRA changed the rules to require reports only if they had been qualified by an accountant for a mistake or area of concern.

The new obligation is intended to help identify which firms should be obtaining reports, whether they are doing so, and whether reports are being submitted on time.

The new rules should come into force early next year, subject to approval by the Legal Services Board.

The Law Society said it is concerned about the separation of compliance roles based on the levels of turnover and client money held.

Society president Mark Evans said: 'The SRA proposes thresholds to determine separation of roles based on turnover and client money held in a reporting period. We are pleased that the client money threshold has been increased, although it may still be too low for some smaller firms. We are disappointed that the turnover threshold has not been increased, and the figure was arrived at by the SRA without any risk-based analysis or modelling, which we consider essential.

'In smaller firms, separation of compliance roles is likely to be ineffective, and impractical. This is because it is unlikely to prevent the perceived risk as owner-managers will still have effective control even if the COFA is a third party or employee. It is unlikely to improve outcomes, with a risk of weakening rather than strengthening compliance. Small and medium sized firms would be unfairly impacted by increasing costs which are likely to be passed on to consumers and adversely affect access to justice.

'The proposals risk disproportionately affecting black, Asian and minority ethnic solicitors, who are overrepresented in the small firm sector, as well as practitioners in legal aid, community-based work and sole practice environments.'

The Society urged the LSB to either modify the SRA proposals or require robust post‑implementation monitoring and review.

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