The SRA just changed the rules, and smaller firms are going to feel it most

We’ve spent years working alongside law firms – mostly smaller/medium sized practices – and run one ourselves, so we’ve seen first-hand how much compliance already weighs on the people running them.

The partners who are also fee earners, the practice manager, the HR department, and yes, the COLP and COFA.  So when the SRA announced its latest package of rule changes last week, my first thought wasn’t about the policy rationale. It was about those people.

The changes are real, they are coming, and they carry teeth. Let me walk you through what’s actually happening, what it’s likely to cost you in time and money, and what you can do about it.

What’s changing, and when

The SRA has confirmed a raft of new requirements following a consultation triggered by the collapse of Axiom Ince and SSB Law, which between them left around £100 million of client money unaccounted for. You can understand the regulator’s urgency. But that doesn’t make the burden on compliant firms any less real.

Subject to Legal Services Board approval, the new rules are expected to come into force in early 2027. That sounds like a long way off, but it really isn’t!

Here are the key changes:

All firms holding client money must submit annual accountants’ reports – qualified or not.

Since 2014, only qualified reports had to go to the SRA. That’s changing. Whether your accountant gives you a clean bill of health or not, the report goes in. A mandatory annual declaration must also be filed each year confirming your accounting period, your reporting accountant’s details, and whether you consider yourself exempt.

A word of caution here for firms that think they may be exempt. The existing exemptions do remain – if your only client money comes from the Legal Aid Agency, or if your average client account balance stays below £10,000 and never exceeds £250,000 at any point in the year, you may not need to obtain a report. But here is the crucial point: the mandatory annual declaration must be filed by every firm, including those claiming exemption. The declaration is how you tell the SRA you are exempt. Assuming you don’t need to do anything because you’re exempt would be a costly mistake.

Fixed financial penalties for late or non-compliant submissions.

There is no  grey area here. File late, or fail to file, and you will be fined. The SRA’s own spot-check exercise found that of 596 firms surveyed, 25 had failed to obtain a report at all for their last period, and a further 31 were late. Those firms now have a very clear signal of what’s coming.

Separation of COLP and COFA roles in higher risk firms.

Higher risk firms with annual turnover above £600,000 or a client money balance above £2 million at any point in their accounting period will be required to separate the compliance officer roles from anyone who can “unilaterally determine or direct significant management decisions.” In plain English: the owner-manager cannot hold both the reins of the business and the key compliance roles.

The numbers here are significant. According to SRA data from 2024–25, 3,525 firms – nearly 40% of all regulated firms in fact – have a turnover exceeding £600,000 and fall within scope on that basis alone. After consultation pushed back on the original £500,000 client money threshold, the SRA raised it to £2 million; that change reduces the number of smaller firms caught by the client money provision from 1,302 to 576. But the turnover threshold remains unchanged, and that’s where the majority of firms in scope will find themselves.

The real-world pain points

Let me be honest about what this means in practice, because I don’t think the SRA’s consultation documents quite capture it.

For the annual declaration and accountants’ report: You will need to actively manage your reporting accountant relationship in a more structured way than before. Many smaller firms have a fairly informal arrangement; their accountant does the work, the report arrives, and that’s that. Under the new regime, you will need to ensure the report arrives on time, that it covers the right period, and that you file the accompanying declaration correctly and promptly. If your accountant is slow – and some are – you carry the risk of the penalty, not them. The SRA dropped a proposal to have accountants submit reports directly, partly because of this very concern.

This means additional liaison time, likely an extra conversation or two each accounting cycle to confirm timelines, agree on the scope of bank confirmation processes, and chase where needed. For many firms, that’s a task that will fall to an already-stretched COFA.

On cost: Reporting accountants may well charge more if the scope of their work increases. If your accountant now needs to seek bank confirmations more routinely, or if the process becomes more formalised to meet SRA expectations, expect their fees to reflect that. There is also the internal time cost – the hours spent gathering information, completing declarations, and ensuring everything lands with the SRA on time.

For the COLP/COFA separation: This is where I feel the most empathy with smaller firms. The Law Society opposed this change strongly, warning that it would result in “higher regulatory costs” for small and medium-sized firms – costs that would ultimately be “passed on to clients” with a knock-on impact on access to justice. I share that concern entirely.

In many owner-managed firms, separating the COLP and COFA roles from the owner-manager is not simply a structural tweak – it requires finding, appointing, and paying a suitably qualified and experienced person to take on one of those roles. That person needs to be genuinely independent, not just nominally so.  And perhaps even more challenging will be finding a suitable person who is prepared to take on the onerous responsibilities and liabilities of being COLP or COFA.

For sole practitioners below the thresholds, the rule is slightly softer: you can remain COLP but not COFA. That’s still a significant change for anyone currently holding both roles. And given that around 600 sole practitioners alone are in scope, the demand for suitably qualified and experienced, independent COFAs willing to work with smaller firms is going to increase sharply. So, in all likelihood, will the cost of securing one.

There is also the governance overhead: supervision arrangements, handover of information, training, and embedding the new structure before it faces any regulatory scrutiny.

One small relief: the SRA has confirmed that firms with “anomalous transactions which are not representative of the firm’s usual or expected business activities” can apply for an exemption from the COLP/COFA separation requirement. If your firm has had an unusual year – for example a one-off large transaction – that has temporarily pushed your client money balance above the threshold, that exemption route is worth exploring.

On the compensation fund: It’s also worth understanding why the SRA is moving so decisively. The £100 million lost through Axiom Ince and SSB Law isn’t just an abstract number – it is a cost that falls, in part, on the wider profession through increased compensation fund contributions. Smaller firms that had nothing whatsoever to do with those failures are nonetheless contributing to clearing them up. That is, I think, a powerful argument for why good compliance practice is in every firm’s interest, not just a box-ticking exercise.

This is just the beginning

The 2027 changes are not the end of this story. The SRA has made clear it is conducting a broader review of whether law firms should continue to hold client money in the way they do today. The possibility of scrapping the traditional client account entirely – in favour of third-party managed accounts, similar to models already operating in France – is being actively considered at a policy level.

That is a longer-term prospect, and the market for third-party alternatives is not yet sufficiently developed for a wholesale change to be imminent. But the direction of travel is clear. The SRA wants more oversight, more transparency, and ultimately more control over how client money flows through the profession. The 2027 changes are the first significant step in that journey, and firms that get ahead of them now will be far better placed when the next set of requirements arrives.

Don’t leave it until it’s too late. A deadline that’s 12 months away feels manageable until it’s six months away and you’re in the middle of a busy conveyancing period, a difficult matter, or a staffing change. With 3,525 firms potentially in scope for the COLP/COFA separation rules, and every non-exempt firm needing to get its accountants’ report and declaration process in order, the compliance community is going to be stretched. The firms that move early will have more options – and more time to get this right.

A gap analysis now will tell you exactly where you stand: whether the COLP/COFA separation applies to you, what your current accountants’ report process looks like against the new requirements, and what steps you need to take before early 2027.

How Enderley Consulting can help

This is precisely what Enderley was set up to do. We work with law firms – particularly smaller and medium-sized practices – who need compliance support that is practical, proportionate, and delivered by someone who genuinely understands the pressures you’re under.

We can help you with:

• Compliance audits and gap analysis – understanding exactly what the new rules mean for your firm, and what needs to change before they come into force
• Outsourced COLP/COFA services – whilst we can’t be your COLP or COFA, we do offer a COLP and COFA support retainer
• Training and support for your team – making sure the people in your firm understand what’s expected of them under the new regime, that your internal processes are fit for purpose, and that your compliance culture is strong enough to give staff confidence in raising concerns internally before they feel the need to go elsewhere.

The SRA is not going to ease up on client money oversight – if anything, as I’ve outlined above, the trajectory is toward more scrutiny, not less, and the 2027 rules are a stepping stone, not a destination. But that doesn’t mean you have to deal with it alone, or that it has to be as disruptive as it might first appear.

If you’d like to talk through what these changes mean for your firm, and the practical steps you need to take, Ed and I would be very happy to have that conversation.