What the approved rules mean, why they emerged and why smaller owner-managed firms are asking the regulator to think again

A quick review

• The restriction kicks in where a firm has more than one manager or owner, crosses either of the financial thresholds and the proposed compliance officer has authority to make or direct significant management decisions.

• The thresholds are – a turnover of more than £600,000 or a maximum client-money balance exceeding £2 million in the most recently completed accounting period.

• The SRA reckons around 1,660 firms (about 18% of the market) plus over 400 sole owner-manager firms need to take action, although we should be wary of this estimate because it is based upon quite limited data.

• Phased implementation is expected from January 2027. The accountants’ report changes applying from April 2027.

A reform born from regulatory failure?

The collapse of Axiom Ince changed the conversation about client money. It was no longer enough to ask whether firms had settled policies and procedures. The more uncomfortable question was whether the people expected to challenge wrongdoing were genuinely independent from those running the business. The SRA’s Consumer Protection Review, launched in February 2024, followed a sharp rise in interventions and several high-profile cases where client money had been stolen, lost or misused. This is not just about protecting clients. The behaviour also undermines confidence in legal services, increases pressure on the compensation fund, sharpers the sting of PI insurance and pushes up the wider cost of regulation.

The SRA’s concern is pretty straightforward. If the same person controls the firm and acts as COLP or COFA, the safeguard may not really be a safeguard at all. Serious breaches may go undetected or unreported because the person who should raise the alarm is also the person whose decisions are under scrutiny. The approved reforms are therefore intended to separate significant management power from the two compliance roles.

That makes sense in principle. The difficulty is turning a governance principle into a rule that works across the profession. We all accept the need to protect client money but the criticism is more practical:- separation on paper is not always separation in reality, and a financial threshold is a blunt instrument when it comes to identifying which firms hold the greatest risk.

What the approved rules actually do

The Legal Services Board approved the SRA’s application on 31 July 2026. The new rule 8.4 will apply to:

• an authorised body
• with more than one manager or owner where,
• in the most recently completed accounting period,
• turnover was more than £600,000
• or the maximum client-money statement or passbook balance exceeded £2 million.

In that kind of firm, a manager or owner who has authority, whether under the constitution, governance arrangements or usual practice, to determine or direct significant decisions about the structure or running of the business will not be able to act as COLP or COFA.

The wording matters. This is not a simple ban on every partner, director or owner holding a compliance role. The key question is whether the individual has real authority over significant management decisions. Firms will therefore need to look beyond job titles and check how power actually works: voting rights, reserved matters, delegated authority, committee structures and day-to-day practice.

What if I am a sole owner?

There are tailored rules for sole owner-manager firms.

• A sole owner-manager above the £600,000 turnover threshold cannot be COLP or COFA.
• Where turnover is no more than £600,000 but the client-money threshold alone is exceeded, the owner-manager may remain COLP but not COFA.

Rule 8.7 also accommodates an anomalous client-money transaction that is not representative of, or anticipated as part of, the firm’s usual business, subject to prompt notification and a written record of the firm’s reasoning.

The package is broader than role eligibility. Firms holding client money will have to submit annual accountants’ reports (qualified or unqualified), together with declarations. Procedural failures may attract fixed penalties. The SRA did not proceed with direct submission by accountants, although the LSB saw potential consumer benefit and expects subsequent work on accountability and practical implementation.

Why the £600,000 line is causing alarm

For many practices, £600,000 of turnover is not an indication of complex corporate structure. A handful of regular fee earners could take a firm over that line whilst leaving only two genuinely senior people available to divide up management, COLP and COFA responsibilities. Specialist boutique firms may also exceed the threshold despite having a small number of staff. One can imagine that in conveyancing, probate and Court of Protection work, spikes in the client-account may simply reflect the timing and value of particular transactions, rather than weak controls or unusual risk-taking.

Some make the point that, in a small firm, owners and directors may be the very people who know the finances, systems and regulatory obligations best. Taking them out of the compliance roles could mean appointing (or perhaps outsourcing to) someone with less knowledge and less practical influence. The Law Society’s objections are similar; the measures add complexity and cost, together with the risk that those costs are passed on to clients, with possible consequences for access to justice. The Sole Practitioners Group has gone further, describing the proposals as discriminatory and unworkable.

There is also a real people problem. A salaried partner or senior employee may be wary of taking on personal regulatory exposure unless they also have proper authority, pay, access to information and protection if they need to challenge the owners about their behaviour. External accountants or compliance consultants can help with the operational work, but that is not the same as handing over statutory accountability. In most cases, the compliance officer still needs to be a manager or employee of the firm, subject to the related-body exception.

How many firms are affected?

Some caution is required here. Different figures are being used to measure different things. Increasing the client-money threshold from £500,000 to £2 million reduced the number of smaller firms brought into scope by that measure from 1,302 to 576, while still capturing around 99% of client money held by the profession. Looking at the package as a whole, the SRA estimated that around 1,660 firms (roughly 18% of all firms), and 431 sole owner-manager firms may need to take action. The LSB noted that this estimate was based on limited information, so it is best treated as an implementation estimate.

The solutions now being discussed

The first response should not be a box-ticking reshuffle. Firms near either threshold should start by:

• Mapping who can actually direct significant decisions and
• Compare that with the current COLP and COFA appointments.

Depending on the firm, the answer might involve:

• Reallocating reserved management powers,
• Appointing a suitably senior employee,
• Splitting COLP and COFA responsibilities between properly empowered people, or
• Redesigning committees so that compliance officers have real access and challenge rights.

Whatever solution is chosen, it needs to work in practice. A supposedly independent officer who lacks information, authority or direct access to the governing body is unlikely to meet either the spirit or the risk-management purpose of the reform.

Industry commentators are also proposing more targeted regulatory tools. Suggestions include:

• Mandatory high-quality training for COLPs and COFAs,
• More frequent client-account confirmations,
• Quarterly control returns for firms holding significant sums,
• Risk-based spot checks,
• Better use of financial intelligence and
• Earlier intervention when warning indicators emerge.

Some have suggested allowing an independent external cashier or accountant to act as COFA, particularly for sole practitioners. That would require careful consideration of eligibility, control, access, insurance and accountability, but it addresses the practical shortage of credible internal candidates.

The bigger issue is that a weakness in governance is not the same as deliberate dishonesty. A determined owner may still be able to dominate, pressure or collude with a nominally separate compliance officer. Separation may give firms another line of defence, but it cannot replace strong bank controls, independent verification and prompt intervention where warning signs appear.

What the SRA is being asked to review

The profession is not really asking the SRA to abandon reform altogether. The central request is for a more proportionate approach. In particular, the SRA is being asked to look again at the £600,000 turnover threshold, because it may catch firms that are commercially successful but structurally small. Firms also need detailed guidance and examples on what counts as a “significant management decision”, how the anomalous-transaction exemption will work, how group structures should be treated and what the transition arrangements will look like. Without that clarity, firms may over-correct by, for example, removing experienced compliance officers unnecessarily or find out - too late - that an informal governance practice makes an appointment ineligible.

There is also a strong case for checking outcomes after implementation. Is there an appetite at the SRA to test whether the changes produce more independent challenge and earlier reporting? Useful indicators may include:

• The number of role changes,
• Problems recruiting eligible officers,
• The number of exemption requests,
• Reports made by newly separated officers,
• Firm closures, and
• The impact on service availability.

If the aim is to reduce consumer harm, success should be measured by better detection and protection, not simply by creating neater organisational charts.

A practical agenda for firms

• Check both thresholds against the most recently completed accounting period, including the peak client-money balance rather than only the year-end figure.
• Identify every person who determines or directs significant management decisions under formal documents and usual practice.
• Stress-test existing / proposed COLPs and COFAs for authority, competence, time, access to records, reporting lines and independence.
• Document rationale for appointments, governance changes and any reliance on the anomalous-transaction provision.
• Budget for recruitment, remuneration, training and external compliance support, but remember - Support does not remove the office-holder’s responsibility.
• Follow the SRA’s implementation guidance and timetable. A title-only change will not be enough.

The reforms are now approved, but the proportionality debate is not over. The SRA is right to challenge concentrations of power that potentially silence dissent. The profession is right to ask whether this particular threshold pushes smaller firms into artificial structures that do not actually improve oversight. The best outcome protects genuine independence without eroding the very practical knowledge and control that many smaller firms rely on to keep client money safe.

Evan Wright is a partner and barrister in JMW’s Professional Regulation team. Evan is also a Law Society certified Lexcel Consultant, as well as a civil and commercial mediator.