SRA’s New Client Money Reporting Rules: What Law Firms Need to Know

The Solicitors Regulation Authority (SRA) is introducing major changes to client money rules. The headline change: all firms holding client money must submit annual accountants’ reports, whether or not issues are identified. For those who remember the 1998 Accounts Rules, this is a return to familiar territory - annual reporting was standard before the SRA moved in 2014 to a risk based approach of only requiring reports where issues arose.

The SRA’s focus on protecting client money has intensified following high-profile cases such as Axiom Ince and PM Law, which saw over £100 million in client funds lost. These events exposed gaps in the current risk-based approach, prompting the SRA to strengthen oversight and encourage tighter controls. The reforms are part of a broader review into whether firms should continue to hold client money in the current way, so further changes may follow.

All firms holding client money must submit an annual accountants’ report to the SRA, regardless of the amount held or whether the report is qualified.

Firms meeting exemption criteria (average client account balance below £10,000 and never exceeding £250,000) won’t need to submit a report, but will be required to file an annual declaration confirming exemption status.

All reports must be submitted, not just qualified ones. Fines and penalties will apply for late or non-compliant submissions, and for failing to file the required declaration if claiming exemption.

Firms must submit additional declarations and information, including: 

• Annual declaration of accounting period and accountant details
• Confirmation of compliance with SRA Accounts Rules (including regular reconciliations and record-keeping)
• Notification of changes (e.g. exceeding exemption thresholds or starting/stopping holding client money)

This enables the SRA to mitigate the risk of client money losses, improve regulatory visibility, and ensure all firms are accountable for how they manage client funds.

Larger or higher-risk firms will face increased expectations around separation of duties, affecting COLP and COFA roles, senior management responsibilities, and internal oversight.

Any law firm with turnover above £600,000 or holding more than £2 million in client money will be affected. These thresholds are not particularly high, and several of our SRA-regulated clients in the South West will fall within scope. So it is important for all firms – small and large - to review their position and prepare for compliance.

These changes represent a reset – a move away from exception-based reporting towards consistent, sector-wide reporting and greater regulatory visibility. The SRA will undoubtedly use the data collected to intervene earlier and more effectively, focusing on firms that show signs of higher risk.

Firms should begin now to:

• Review client account controls and documentation
• Ensure procedures, reconciliations, and processes are consistently applied
• Assess whether governance structures provide sufficient independence
• Prepare for annual reporting as a standard requirement

These reforms also may prompt firms to make strategic decisions about the type of work they undertake and whether they wish to continue holding client money, given the increased compliance burden and associated costs. For some, it may be time to reassess whether accepting client money is worth the additional regulatory requirements.

The changes are expected to come in as early as 2027, once approved by the Legal Services Board. Firms should begin preparing now by reviewing systems, controls, and governance frameworks to ensure they can meet increased regulatory expectations. Early action will help minimise disruption and demonstrate a strong control environment to both regulators and insurers.

If you would like advice or support with SRA compliance, accountants’ reports, or broader risk and governance matters, please get in touch.