SRA client money consultation: What law firms need to know about M&A

The SRA’s consultation, Client Money in Legal Services: Notifying the SRA of Changes to Help Identify and Act on Risks, proposes a framework requiring firms to notify the regulator of specified events.

Its immediate proposal is that a contemplated merger or acquisition becomes notifiable when it reaches Heads of Terms, or an equivalent stage. This reflects the SRA’s concern that acquisitions can rapidly change a firm’s financial, operational and client money risk profile.

The consultation closed late summer and at the time of writing, the SRA has not published its formal analysis of responses. Some key parties, including the Law Society and the Legal Services Consumer Panel, have published their own views. These indicate support for better risk identification, but also concern about proportionality, duplication, uncertainty over the trigger point and how the SRA will use the information supplied.

What is proposed for M&A?

The proposed rule would require notification once Heads of Terms, or their equivalent, have been reached. The SRA would ideally like visibility at least 30 days before expected completion, while recognising that completion dates can move and distressed transactions may progress much faster.

The proposed notification would cover the acquiring and target firms, their turnover and client money balances, practice areas, expected completion date, acquisition activity during the previous 24 months and the intended post-transaction structure. The SRA emphasises that notification is not approval, although it may contact the parties and request further information.

Published responses in summary

The published responses broadly recognise that some M&A activity can justify increased regulatory visibility, particularly where a transaction involves rapid growth, financial distress, substantial client balances or a complex group. However, respondents have questioned whether a broad prescribed-events rule could expand without sufficient safeguards, increase the burden on smaller firms, duplicate information already supplied and create uncertainty for legitimate transactions. There is also debate over whether notification alone is sufficient for the highest-risk cases and whether fixed penalties are appropriate for procedural failures.

The FCA comparison

My firm’s previous consultation response referred to the FCA’s more interventionist change-in-control approach. The Legal Services Consumer Panel has also questioned why the SRA proposes notification rather than prior approval. The regimes are not directly interchangeable, but the comparison highlights the central question: if the SRA identifies a serious concern before completion, what action will it take? Visibility only improves consumer protection if the information is assessed quickly and leads to proportionate intervention where necessary.

Why the proposals matter to the COFA

Although the formal notification obligation would sit with the regulated firm, the COFA is likely to be central to readiness, due diligence, and the regulator’s confidence in the transaction. Client money balances are one of the specific data points proposed, and the acquisition may change the volume, type and operational complexity of client account activity. A COFA should therefore be involved before Heads of Terms, not introduced only shortly before completion.

For the acquiring firm, the COFA should understand what is being acquired and whether the finance function can safely absorb it. For the target, the COFA should ensure that information supplied during due diligence and to the SRA is complete, current and consistent with the firm’s books, accountants’ reports, regulatory history and prior declarations. This will assist with both the proposed SRA regulations and the due diligence requirements.

Practical COFA considerations

• Client money profile: quantify balances, transaction volumes, residual balances, office-to-client transfers and suspense ledgers
• Accounts Rules compliance: review breaches registers, reconciliations, banking arrangements, authorisations, shortages, corrective action and any themes raised by the reporting accountant.
• Financial stability: assess cash flow, drawings, lock-up, tax and lender obligations, contingent liabilities and whether financial pressure could create incentives to misuse or delay the return of client money. This should encompass forecasting for the cash flow position of the future firm.
• Systems integration: plan how client ledgers, bank reconciliations, payment controls, matter data and residual balances will migrate. Responsibility for reconciliations and breach reporting should be explicit throughout transition.
• Governance and capacity: confirm that the combined finance team has sufficient skills, independence and resources, with clear escalation routes to the COLP, managers and governing body.
• Notification evidence: retain the basis for turnover and client money figures, decisions on timing and correspondence with transaction advisers. If information changes materially before completion, consider whether the SRA should be updated.

The COFA should also be alert to confidentiality. M&A information is commercially sensitive and sometimes price-sensitive. Firms need a controlled process identifying who may prepare, approve and submit a notification, how documents are secured and how the disclosure interacts with contractual confidentiality provisions. This should not prevent regulatory compliance, but it should avoid unnecessary circulation of sensitive material.

What happens after notification?

The consultation says that the SRA may engage further and request additional information, but it does not explain the assessment process in detail. Firms and COFAs will want to know the expected response time, whether completion can proceed during enquiries and what risk factors trigger enhanced supervision. Possible indicators include a distressed target, unexplained client account issues, serial acquisitions, rapid growth, material control weaknesses, complex ownership or funding structures, and insufficient management or finance capacity.

This supports the traffic-light approach my firm suggested in a previous consultation response. A low-risk transaction could be acknowledged with no further action. An amber case could prompt focused questions, enhanced monitoring, or a post-completion plan. A red case could lead to urgent supervisory engagement and consideration of the SRA’s existing regulatory powers. Clear criteria would make the regime more predictable and allow COFAs to prepare evidence addressing the relevant risks.

Conclusion

There is a credible case for greater oversight of law firm M&A, especially where client money, distress or rapid expansion is involved. For COFAs, the proposal turns regulatory notification into a practical transaction-readiness issue. Early involvement, robust client money due diligence, documented controls, and a realistic integration plan will be essential.

If your firm is considering a merger or acquisition and would like support with client money due diligence, regulatory compliance or transaction readiness, please don’t hesitate to get in contact with Joel Topham, Patrick Lynch or your usual AAB contact.