The Legal Services Board (LSB) approved new rules requiring law firms to separate management from compliance roles in most practices. The changes aim to reduce conflicts of interest and improve oversight.
The Solicitors Regulation Authority (SRA) proposed the reforms, which will require firms to clearly define decision-makers and compliance officers—except in the smallest practices. A phased rollout begins in January 2027, with larger firms complying first.
Most client money covered by 2027
The LSB stated the reforms should protect about 99% of client funds by April 2027. The SRA initially faced opposition from the Law Society and the Sole Practitioners Group, which claimed the changes would place an unfair burden on small firms.
After a December consultation, the SRA adjusted financial thresholds for exemptions. The maximum annual turnover for exemption remained at £600,000, while the client money cap increased from £500,000 to £2 million. Firms below these limits can still act as compliance officers for legal practice but not for finance and administration.
The LSB estimated that around 1,660 firms—about 18% of all regulated firms—and 431 sole owner-manager practices may need to restructure. The estimate relied on limited data.
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A separate exemption allows small firms to exceed the £2 million threshold for unusual transactions outside their normal business. The LSB expects the SRA to release guidance and examples before this exemption takes effect.
Accountants’ reports now mandatory
From April 2027, all law firms must submit annual accountants’ reports, even if the accountants are not fully qualified. Non-compliance will result in fixed financial penalties.
The SRA initially suggested accountants submit reports directly to the regulator but dropped the plan after feedback raised concerns about liability and practical issues. The LSB still believes direct submissions could benefit consumers and urged the SRA to explore the model further.
The SRA recognized the potential advantages but said more work was needed to prepare the sector. The LSB expects updates on progress.
The regulator has frequently adjusted its proposals after industry feedback. Many solo practitioners and micro-firms will need to rethink compliance structures, often with limited resources. The exemption for unusual transactions provides some flexibility, but firms must handle the new thresholds to avoid penalties.
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The LSB noted that while the changes strengthen consumer protections, higher compliance costs might be passed to clients, potentially reducing access to justice. The oversight body expects the SRA to monitor the impact and report any affordability concerns.
The SRA argued that in a competitive market, firms may absorb some costs rather than increase prices. Without clear data on outcomes, the regulator’s ability to intervene early depends on how quickly firms adapt.
The LSB concluded the proposals could improve transparency and consumer protections. It also stressed the need for balance, warning that excessive regulation could create difficulties if firms struggle to implement the rules.
Smaller practices may find the transition particularly challenging.