On Friday 19 June, the SRA launched its next consultation linked to their focus on protecting client money held by solicitors:
Notifying the SRA of changes to help identify and act on risks.
As part of the Consumer Protection Review, the SRA identified the need for collecting different and more timely information from firms in certain circumstances to help spot and target risks. This need has been emphasised by the recent number of high-profile firm failures with significant sums of client money being stolen or lost.
The SRA decided that its immediate priority was to target three key areas from the November 2024 consultation that focused on strengthening protections for client money within the current system, in order to make a difference more quickly.
- The SRA has already announced the requirement for all Accountant’s Reports to be filed, as well as declarations for firms who are exempt, as a response to evidence that a proportion of firms were not obtaining Accountant’s Reports as required
- Again, an announcement has already been made with regard to separating the roles of COLP and COFA from those with unilateral decision-making abilities in larger law firms
- Now the SRA has turned its attention to improving oversight of firms significantly changing their profile, including as a result of sales, mergers and acquisitions.
The SRA has stated that it is moving towards a more intelligence-led, proactive supervisory regulatory model, and that significant progress has been made in risk and data capability to help spot risks earlier and to increase capacity to respond to them. However, the SRA admits that more needs to be done to ensure there are strong data foundations, which will allow it to move from reactive to proactive regulation of the sector.
Firms are already required to notify the SRA of material changes to information previously provided. However, the SRA has admitted that, in practice, it is often not told of changes that may be considered material in the context of protecting client money at the time that they happen.
The SRA plans to introduce a broad rule requiring firms to notify it of certain events as and when they arise. Rather than provide a list of specific events now, the SRA wants to be able to change or introduce new events that will require a firm to make a notification, as well as when a notification would be required and the information needed.
For now, the SRA is proposing to prescribe two events which will require firms to:
- pre-notify the SRA of a merger or acquisition that has reached the Heads of Terms stage or equivalent; and
- notify the SRA when they begin to receive or hold client money, having previously reported that they do not do so at either authorisation or through the most recent practising certificate renewal.
Why is the SRA focusing on mergers and acquisitions? The consultation notes that a merger or acquisition can significantly change the risk profile of a firm, and describes potential risk scenarios that might arise, such as:
- Firms may acquire other firms in order to access large client account balances, and firms may adopt complex business and governance structures across a group that make it harder to spot illegitimate money transfers
- Firms expand into areas of law or adopt financing arrangements that incentivise high volumes of cases or rapid growth without sufficient regard to client outcomes
- Finally, risks arising from poorly executed change or expansion beyond a firm’s capacity and capability. This includes, for example, inadequate systems, governance or expertise to support entry into new practice areas, or ineffective integration following an acquisition.
The proposal is that a merger or acquisition that is being contemplated and that has reached the Heads of Terms or equivalent stage is deemed a notifiable event. However, as the period between Heads of Terms being signed and completion can be variable, the SRA has suggested that it should be notified at least 30 days prior to the likely completion date for the merger or acquisition and as close to 30 days in advance as possible.
Information that the SRA will want to see includes:
- The names and turnover of both firms in discussions;
- The amount of client money held by both firms;
- Expected completion date;
- The number of acquisitions by both firms in the previous 24 months; and
- The planned structure of the merged firms.
It’s important to note that in both events this is a notification only, i.e. the SRA is not suggesting that they should have to approve either an M&A event or the holding of client money.
Firms have until Monday 17 August to respond.
