New rules will be brought in requiring 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 which has been magnified in the last two years with 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 firms’ client account.

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

As well as new reporting requirements, higher risk firms with a turnover of more than £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.

Read more

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.

Topics