COLP & COFA Changes: Understanding New Regulation Impacts
A major change is coming for hundreds of law firms
The Solicitors Regulation Authority (SRA) has proposed new restrictions regarding who can serve as a Compliance Officer for Legal Practice (COLP) and Compliance Officer for Finance and Administration (COFA). Under the new COFA regulations, individuals who can exercise unilateral management control over a firm may no longer be eligible to act as its COLP and/or COFA if certain financial thresholds are exceeded. For larger organizations with robust management and compliance teams, differentiating these roles may be relatively manageable. However, for small, medium, and boutique firms, the SRA proposals could present significant challenges. The SRA estimates that around 1,660 firms may be impacted, including approximately 431 sole owner-manager firms.
What could this mean in practice?
A small firm can exceed £600,000 turnover while employing only a handful of people. A specialist firm can also cross the proposed financial thresholds because of the nature of its work, despite having a small team or relatively little client money actually held in its client account.
For some firms, the proposals could mean that the person who founded and manages the practice, built its compliance systems and has the greatest knowledge of its finances and operations is no longer permitted to hold its compliance roles.
Where there is nobody else suitable within the business, the firm may have to:
- recruit an additional senior employee;
- appoint or promote somebody else into the role;
- outsource the COLP or COFA function;
- restructure its management arrangements; or
- reconsider aspects of how the firm operates.
And this could apply even where the firm has an excellent regulatory history and no history of client-money problems.
Why are we concerned?
We fully support strong regulation and the SRA's objective of protecting client money.
Our concern is whether these particular measures will actually achieve that objective.
The proposals use financial thresholds and management structure as indicators of risk. But a firm's turnover does not necessarily tell us how large or complex it is, how well it is run, or how much risk it presents to client money.
A firm turning over £599,000 may retain its existing arrangements. A firm turning over £601,000 may be required to change them, despite there being no meaningful difference between their governance, regulatory history or financial controls.
At the same time, potentially hundreds of firms could be looking for alternative COLPs and COFAs at once, creating questions about whether enough suitably experienced people are available and what those arrangements will cost.
We believe there are better ways to target the actual risk.
What are we asking for?
We are not asking for weaker regulation.
We are asking the SRA to pause implementation and properly examine the evidence, impact and alternatives before requiring hundreds of firms to change their governance structures.
Our proposals include better use of client-account data, enhanced financial monitoring, mandatory reporting where appropriate, stronger training and a genuine risk-based approach which considers the circumstances of individual firms rather than relying principally upon financial thresholds.
Above all, we are asking a simple question: Before hundreds of law firms are required to restructure, shouldn't there be clear evidence that doing so will make client money safer?
