Samantha Griffin considers what the latest announcements from the SRA on handling client money will mean in practice for law firms' accounts teams.
What’s changing?
The two main reforms are significant.
First, all firms holding client money will be required to submit annual accountants’ reports to the SRA, together with key information through a declaration. Firms relying on exemptions will need to provide information confirming their exemption status. Fixed financial penalties will also be extended for late or missed submissions.
Second, higher risk firms with turnover of more than £600,000, or holding more than £2 million of client money, will need to separate certain leadership and compliance roles. Individuals who make significant decisions about how the firm is run will no longer be able to act as the firm’s COLP or COFA. There will be a partial exemption for smaller sole owner manager firms where separation is less practical.
For legal cashiers and accounts teams, the accountants’ report change may be the most immediate operational issue. More firms will need to be ready for a submission process that is visible to the regulator, regardless of whether the report is qualified. That means diary management, evidence gathering, breach records, reconciliation records and communication with reporting accountants will become even more important.
This is unlikely to be a once a year exercise that can be dealt with shortly before the reporting deadline. Firms will need to maintain good records throughout the year and be able to show that issues have been identified, considered and resolved. Where exemptions apply, the basis for relying on them will also need to be documented properly.
For heads of finance and senior accounts professionals, the practical message is clear. The accountant’s report process should be managed as part of the firm’s wider risk and governance framework. Client account reconciliations, residual balances, suspense ledgers, client to office transfers, interest policies, breach registers and internal reviews all need to be capable of withstanding scrutiny. The firms that already treat these processes as active controls will be in a stronger position than those that view them as administrative tasks.
Strategic impact
The role separation proposals raise more strategic questions. Many firms, particularly smaller and medium sized practices, have historically relied on senior leaders wearing several hats. In some firms, the managing partner, owner or finance lead may also carry formal compliance responsibility. The SRA’s concern is that where too much power and oversight sit with one individual, internal challenge can be weakened.
There is logic in that position. A COFA needs sufficient authority to do the job properly, but also enough independence to question decisions, escalate concerns and report serious issues where necessary. If the same person controls the commercial direction of the firm and is responsible for reviewing compliance with client money rules, there is a risk that challenge becomes diluted, especially under financial pressure.
For firms caught by the proposed thresholds, this could require a serious governance review. It may affect role descriptions, reporting lines, management structures, succession planning and the way compliance officers are supported. It could also require greater investment in training and resource for those taking on COFA responsibility.
Adding to the burden of work for legal accounts teams
Does this create more red tape? In some respects, yes. There will be more reporting, more visible deadlines and, for some firms, a need to revisit structures that have been in place for years. Accounts teams may feel the additional burden most sharply, particularly where they are already managing heavy workloads, demanding fee earner queries and complex client account activity.
That concern should not be dismissed. Regulation that protects clients must still be workable for the people who have to apply it. Extra requirements will only improve standards if firms give accounts and compliance teams the time, systems, authority and training to meet them properly.
Even so, the direction of travel is understandable. Client money is one of the most sensitive areas of law firm management. When controls fail, the consequences can be severe for clients, firms, insurers, the compensation fund and public confidence in the profession. Problems with client money often become visible only after harm has already occurred. Earlier visibility should give the regulator, reporting accountants and firms a better chance of spotting weaknesses before they escalate.
The announcement is therefore good news if it leads to stronger governance, clearer accountability and better internal communication. It will be less successful if firms respond by treating the changes as another compliance form to complete. The real value lies in the conversations these reforms should prompt inside firms.
Do accounts teams have proper authority? Is the COFA genuinely able to challenge senior people? Are breach registers reviewed for patterns, rather than simply maintained? Are residual balances being managed proactively? Are reconciliations reviewed with enough understanding? Are reporting accountants engaged early enough? Do fee earners understand how their behaviour affects client money risk?
These are practical questions, but they are also cultural ones. A well-run finance function is central to client protection and firm stability. Legal cashiers, COFAs and senior finance professionals should not be treated as back office administrators who simply process transactions. Their work is a key foundation of risk management, regulatory compliance and trust in legal services.
The SRA’s reforms should give firms a clear opportunity to recognise that. Preparing for the new rules now will help avoid a rushed response later, but it will also help firms strengthen the systems, relationships and controls that protect clients every day.
The ILFM supports legal finance and compliance professionals through specialist training, qualifications, guidance and a professional community that understands the realities of working with client money. Find out more about how we help here: https://www.ilfm.org.uk/site/members/
Samantha Griffin, Professional Development Manager, ILFM
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