Proposed changes to the eligibility requirements for COLPs and COFAs continue to generate considerable discussion across the legal profession.
The SME & Boutique Law Firm Alliance has now prepared an Open Letter to the Solicitors Regulation Authority setting out concerns about the potential impact of the proposals, particularly on smaller and owner-managed practices.
Given the importance of the COFA role to many ILFM members, we believe it is important that legal finance and compliance professionals are aware of the arguments being put forward and have the opportunity to contribute their own experience to the wider discussion.
What is the Open Letter asking for?
The Open Letter calls on the SRA to pause implementation of the proposed restrictions while their practical impact, evidential basis and proportionality are examined further.
One of its central concerns is the proposal that, once specified financial thresholds are exceeded, an individual capable of exercising unilateral management control may no longer be able to act as their firm's COLP and/or COFA.
The Alliance cites SRA estimates that approximately 1,660 firms could be affected, including around 431 sole owner-manager firms. It argues that the impact could therefore extend well beyond a small number of large or unusually complex practices.
Among the questions raised by the letter are whether turnover alone is an appropriate indicator of regulatory risk, whether sufficient suitably experienced COLPs and COFAs would be available if large numbers of firms needed to change their arrangements at the same time, and what the financial and operational implications could be for smaller practices.
It also considers whether requiring greater separation between management and compliance will necessarily result in stronger protection for client money in every firm.
For example, in some smaller practices, the individual with the greatest knowledge of the firm's finances, controls, systems and client account may also be its owner or senior decision-maker. The Open Letter questions whether replacing that individual with an employee or external provider will always create stronger oversight, particularly where the replacement has less day-to-day visibility of the firm's financial activity.
The Alliance also argues that greater use of financial intelligence, reconciliation data, accountants' reports, unusual transaction monitoring and other indicators of actual financial risk should form part of the discussion around future regulation.
Its position is not that regulation should be weakened. Rather, it is asking whether regulation can be more closely targeted at the indicators of client-money risk the SRA is seeking to address.
A complex issue with different perspectives
The ILFM recognises the concerns being raised and the potential significance of these proposals for some firms and individuals.
We also recognise that our membership represents a wide range of firms, roles and operating models. The effect of regulatory change will therefore not be the same for everyone.
Some members may share the concerns expressed in the Open Letter. Others may see advantages in greater separation between management and compliance responsibilities. Many may feel that the right approach depends upon the size, structure, systems and risk profile of the individual firm.
Our role is to help members understand developments, provide a professional space in which different perspectives can be considered, and ensure that the experience of those working directly in legal finance and compliance forms part of the wider conversation.
Why practical experience matters
The SME & Boutique Law Firm Alliance has also been asked to provide practical case studies illustrating how the proposed changes could affect firms.
This is an area where the experience of ILFM members could be particularly valuable.
If your firm expects to be affected, there are a number of practical questions worth considering. Would your current COFA arrangements need to change? Is there another suitably experienced individual within the firm who could take on the role? Would you need to recruit or consider an external or fractional COFA? What would that mean for cost, oversight, reporting structures and day-to-day access to financial information?
Equally, if you support the proposed changes, we would welcome your perspective on how greater separation could strengthen governance or the protection of client money within your firm.
There is no expectation that members should take one particular side. Experiences and views from across the spectrum can help create a more informed discussion about how the proposals may operate in practice.
Keeping the conversation open
The Open Letter is one contribution to a much wider debate about how the profession should protect client money, structure compliance responsibilities and respond to regulatory risk.
These questions matter greatly to ILFM members. COFAs, legal cashiers, finance directors, practice managers and other legal finance professionals often see first-hand how regulatory requirements operate in practice, where controls work well and where unintended consequences can arise.
We will continue to follow developments closely and keep members informed as the position evolves, including through ILFM communications and Legal Abacus.
How can you get involved?
The SME & Boutique Law Firm Alliance is inviting individuals and firms affected by the proposals to read its Open Letter and decide whether they wish to add their name as a signatory.
The Alliance has also advised ILFM that it is seeking sufficient support to request a Special General Meeting of the Law Society. Under the Law Society’s current rules, such a request must be supported by at least 0.5% of solicitors on the register. The Alliance has told us that this currently equates to approximately 1,090 signatures.
ILFM is not asking members to support or oppose the Open Letter. We are sharing it so that members can consider the arguments being put forward and make their own assessment.
Read the SME & Boutique Law Firm Alliance Open Letter and find details of how to sign it here
We would also like to hear directly from ILFM members, whether you support the proposed changes, oppose them or have concerns about particular aspects of how they may work in practice.
If you would like to share your views or a practical example of how the proposals could affect your firm, please contact us at info@ilfm.org.uk
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