Living the Eye Life! – November 2025
Here is our latest selection of queries received whilst we are on the front line working with law firms.
Q Why don’t law firms have to register full accounts with the SRA. Surely this would prevent some of the interventions before things go too disastrously for the compensation fund which other firms feel the brunt of?
A This is a great question and one that deserves a detailed explanation. By way of background, it’s worth noting that the Legal Services Board (LSB) have already told the SRA that they expect them to be “obtaining and reviewing firms’ financial and accounting information” so we expect that to include more detail than just abbreviated accounts at Companies House. This information is by definition at least 9 months out of date and unaudited. The bigger question is what will the SRA be asking for? For the time being we can only make educated guesses.
A number of credit reference agencies exist which continuously monitor the financial performance of all types of companies including law firms. By adopting this kind of requirement, the regulator would be able to quickly identify if a law firm was beginning to experience financial difficulties. But this kind of policy is only the beginning.
Many firms still do not produce meaningful management accounts including accurate cash flow forecasts that would enable a firm to identify potential bumps in the road ahead. The reason for this is usually down to a lack of resources and no legal requirement to do so. There is considerable speculation that the regulator will move closer to an environment that resembles the Financial Conduct Authority (FCA). This would no doubt involve firms having to demonstrate if requested that they are indeed actively tracking their financial performance and make it a legal requirement to contact the regulator if there is any doubt as to whether they are a going concern. Failure to do so would result in financial penalties being levied against the firm and the individuals tasked with running the firm.
This leads quite nicely to another measure that is also an LSB requirement. Firms will be required to split out the existing roles of COFA, COLP and MLRO to prevent one individual (who is often the sole shareholder) from acting alone and potentially acting in a manner that could put Client money at risk and jeopardise the future viability of the firm. This would mirror the way other businesses that hold third party funds are regulated by the FCA.
So, in summary, firms may well have to register full accounts with the SRA but that will just be the tip of the iceberg.
Q I work in a business where residual balances & file closures are not being dealt with in any particular time frame. What can I do to bring this to the attention of management?
A The first part of this answer to advise them that the firm will undoubtedly be in breach of Rule 2.5 – “You ensure that client money is returned promptly to the client, or the third party for whom the money is held, as soon as there is no longer any proper reason to hold those funds”. Failure to remedy this breach could lead to serious financial penalties being imposed against both the firm and potentially individual disciplinary sanction. The SRA is becoming much tighter on qualified AR1 reports and are recruiting forensic investigators for this purpose. Rule 2.5 remains the number 1 reason for qualified reports, so the risk is very real, and increasingly leading to investigations. Therefore, deal with the residual balances in accordance with Rule 2.5 and then close and archive the file.
Q Billing seems to be an issue in the firm I work for. They are not being raised or delivered in a timely fashion. It all seems a bit haphazard, and I would like to know a little more about what I should be looking for.
A Well the Rules are quite straightforward
Rule 4.3a – you must give a bill of costs, or other written notification of the costs incurred, to the client or the paying party
Rule 4.3b – this must be done before you transfer any client money from a client account to make the payment
So, if you are being asked to transfer monies from client to office without complying with these two rules you are in breach. Delivery of the bill to the client is key and you must ensure that the bill has been raised in accordance with the terms of your engagement letter under the Transparency Rules and to protect the Client. If you are concerned that this is not the case, you should raise this with your supervisor to prevent further occurrences.
Q What support is currently available for COFA’s from the SRA?
A The ILFM has launched iCOFA, which has been designed to provide independent support, expert resources, and a thriving peer network for COFAs, Deputy COFAs, and their teams across the legal sector. They can provide training for new and experienced COFAs, peer-to-peer support, practical tools to simplify regulatory obligations including the ILFM COFA Handbook and resources to build and maintain robust systems and controls.
They can put you in touch with experts who can help you with specific questions or help that you may need, including Financial Eye. Your questions can be sent to ILFMiCOFA@financialeye.net and we will assist you.
The SRA does provide an ethics helpline that firms are able to take advantage of. It is a good service, although it is always sensible to get any response in writing if you believe you may need to rely on their answer in the future. In some situations, the COFA might, for a number of reasons, be nervous about bringing the matter to the attention of the SRA. In these instances, you may wish to consider approaching the ILFM first
David Thorpe
Director – Financial Eye