Client money in law firms: what new proposals could mean for your business

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The landscape is changing within the law sector, with several proposals currently under review that will impact solicitor firms of all sizes.

The Solicitors Regulation Authority (SRA) is reverting to a closer and more active approach in how law firms safeguard client money, with proposals aimed at having increased transparency, timely information and a wider spread of responsibilities of senior roles.

In response to the Legal Services Board (LSB) review, the SRA is looking to learn from underlying causes of recent failures to recognise situations of higher risk earlier, in the hope of identifying and intercepting, to reduce the exposure of clients and lost reputation within the legal sector.

More impactful for most, will be the Ministry of Justice (MoJ) proposals to divert up to 75% of interest earned on client accounts into a central government fund, to help support an increasingly struggling and overwhelmed justice system.

This article looks at the key emerging issues, alongside the latest consultations and proposals shaping the future regulatory environment for law firms.

Key SRA proposals

The ‘Further consultation on client money in legal services’ opened on 11 December 2025, and closed 20 February 2026.

What changes are proposed to the accountants’ reports regime and why?

A key part of the consultation is the proposal to strengthen the accountants’ reports regime.

Measures under consideration include:

A declaration by firms that they are exempt from requiring an accountant’s report.
Requiring all accountants’ reports to be submitted to the SRA, not just qualified reports as the rules currently state.
Accountants submitting reports directly to the SRA, rather than allowing firms to submit themselves.
Fixed penalties for late or non-submission of Solicitor Accounts Rules (SAR) reports.

The SRA, supported by a survey of 596 firms, found that too many firms were not compliant with the Solicitors’ Accounts Rules, with some firms not obtaining an accountant’s report when they were not exempt, and others not getting the report completed within the required six months.

The proposed changes will provide the SRA with the transparency to assess whether firms are submitting reports where expected and ensuring those reports are submitted within the six month timeframe, by penalising firms for late submissions.

The SRA need transparency to provide sufficient oversight and drive compliance with the solicitors’ accounts rules. The rules are in place to protect client money, and although the majority of firms are sufficiently compliant, the proposals increase the visibility of the SRA to monitor that this is the case.

Allowing the regulator to see whether reports are being completed, assess any qualifications and ensure that reports are being submitted in a timely manner, will no doubt help to facilitate this. For most businesses there should be minimal change, other than ensuring accountants reports are completed and submitted on time by their accountant.

What proposals are made in relation to checks and balances within law firms?

A concern for the SRA, is that past failures have suggested increased risk, when a single individual holds multiple senior roles within a firm, including management, ownership and compliance. The perceived risk is that oversight can rely too heavily on one person, who holds all or the majority of power and control within the firm.

This can lead to limited challenge and review of decisions and processes, increasing the risk of errors or breaches going unnoticed. In response, the SRA is considering introducing clearer expectations around segregation of duties, likely tailored to the firm’s size, by reference to level of turnover or level of client money held.

The SRA acknowledges that segregating roles and responsibilities can be extremely difficult in smaller firms and has asked for feedback within the consultation on the appropriateness of the suggested thresholds, being an annual turnover of £600,000 or the client balance at any point within the preceding year sitting above £500,000.

A wider study carried out by the SRA highlighted current weaknesses with both COFA and COLP roles within firms. The SRA will introduce a support package which, combined with the wider implementations of their proposal, will be the start of a more detailed review, with a continued focus on improving the effectiveness of the roles.

What else is the SRA proposing?

As the industry continues to grow, structures are becoming more complex. Mergers, acquisitions, private equity investment and increasingly intricate ownership and management arrangements create challenges for regulators in having sufficient oversight on whether firms have effective governance.

The bringing together of firms creates many challenges; integrating systems, processes and controls takes time and has to be managed effectively. Investor pressure on results and the drive for investment in efficiencies and technology can also lead to a risk of compliance not receiving sufficient foresight and attention.

The SRA highlighted that they are often not aware of such transactions until after the event and realise the importance of timely awareness of structural changes to identify increased risk to the safeguarding of client money. Proposals are being developed, to be released later this year, which will provide guidance on what such key risk indicators are and when the SRA will need to be notified.

The requirement to inform the SRA of any proposed structural changes provides the opportunity for the SRA to understand and challenge firms on how they will continue to safeguard client money in times of change. To enable this to work effectively, the SRA will need sufficient experienced resource to be able to digest, understand and respond to firms on a timely basis.

The Ministry of Justice targeting client account interest

The Ministry of Justice (MoJ) proposes to divert interest earned on client money accounts away from solicitor firms and into the justice system. No specific designated projects have been suggested for these funds, instead it is proposed that they would be absorbed into general MoJ funding.

The MoJ has proposed taking:

75% of interest earned on pooled client accounts, and
50% of interest on designated client accounts

The proposal has raised concerns across the profession, particularly due to:

The short consultation period
Limited clarity on the practical implementation
The financial impact on firms, especially those involved in legal aid work
Potential effects on pricing models and cash flow for law firms
The additional administrative impact of the changes

The Law Society has highlighted both commercial and operational issues, including consideration of banking changes and the wider impact on access to justice.

We understand the need for further funds within the justice system, but how best to increase the funding within this area is a complex and sensitive matter. The Law Society highlights several points within their response which will resonate with law firms across the country. With the proposal closing date extended until 9^th March, we wait to see how the Government digest and respond to the strong push back that we expect them to receive from the industry.

Plans for the Financial Conduct Authority to take over Anti-Money Laundering supervision of law firms

In October 2025, the Government announced plans for the Financial Conduct Authority (FCA) to become the sole supervisor of Anti-Money Laundering (AML) compliance, taking the role away from the current position of Regulatory Body supervision.

The Government consider the current regime to be complex and disjointed, partly driven by having over 20 different AML supervisors for professional firms, creating inconsistencies and complexities.

The FCA is currently preparing a delivery plan and changes to legislation need to be made before further information is announced later this year on the practicalities of how a transition will occur and how the FCA will approach and liaise with firms going forward.

How can Price Bailey help?

Price Bailey work with many law firms of differing sizes; advising, assisting and guiding management in strategic and operational areas of the business. We offer a full range of compliance services including statutory audit, financial statements preparation, solicitor accounts rules reporting and personal, partnership and corporation tax services.

Working closely with business owners and managers, we are able to understand and advise on the governance and legal structure of the firm and the relevant reporting obligations. We can assist in identifying and assessing risks and weaknesses early, to strengthen governance and oversight before issues arise.

With practical insight, driven from ongoing engagement with our clients and experience of running our own professional services firm, Price Bailey continues to advise firms on both current and future regulatory requirements.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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