Legal Compliance Update

A New Year brings significant challenges for law firms

As we enter 2026, the legal services regulatory landscape continues to evolve at pace, presenting law firms with numerous challenges and compliance obligations. Our latest monthly update highlights several critical developments that demand immediate attention from compliance officers and firm leadership.

The COLP Crisis: a wake-up call for the profession

Perhaps the most striking revelation this month comes from the SRA's thematic review of Compliance Officers for Legal Practice (COLPs). The findings are deeply concerning: 54% of officers reported feeling undervalued, whilst only one officer from those interviewed could adequately describe the material requirements of their role. Most alarmingly, 20% couldn't explain their record-keeping obligations, and half hadn't read the SRA's reporting and notification guidance.

These statistics, though based on a relatively small sample of around 30 officers from approximately 9,000 law firms, expose fundamental weaknesses in the current regulatory model. The report reveals compliance officers struggling under the weight of complex obligations whilst juggling fee-earning and other responsibilities. Many questioned whether they possessed adequate time or resources to fulfil their duties effectively.

This raises a fundamental question about the viability of the COLP regime introduced in 2013. When compliance officers cannot effectively police their employers or fellow owners - particularly junior partners reluctant to challenge senior equity partners - the system's structural flaws become apparent. Perhaps it's time to revisit arrangements such as the old Practice Standards Unit, which conducted regular firm visits every three to five years.

AML supervision transfer: preparing for potential change

The government has announced its intention to transfer anti-money laundering supervision from legal regulators to the Financial Conduct Authority. Whilst officials suggest implementation will take "a number of years," firms should begin monitoring developments closely.

This proposed shift raises concerns about fragmented regulation. Will firms face dual jeopardy - prosecution by the FCA for AML breaches, then referral back to the SRA for professional conduct issues? Several major law societies have already voiced opposition to these proposals, questioning whether the approach serves the profession or consumers effectively.

It's crucial to note that scaremongering has already begun, with some consultancies suggesting urgent action is required. The FCA has been clear: firms compliant under current arrangements will remain compliant during any transition. Don't be pressured into unnecessary expenditure based on unsubstantiated timelines.

SRA's costly prosecution failure

The SRA faces significant embarrassment after being ordered to pay £160,000 in costs following a "fatally flawed" prosecution. The Solicitors Disciplinary Tribunal dismissed the case, a rare outcome that highlights serious concerns about the regulator's approach to enforcement.

This follows two other recent high-profile prosecution failures involving alleged misconduct by libel lawyers. These cases underscore questions about the SRA's investigative standards and decision-making processes. Whilst the regulator ultimately bears these costs, the profession pays through practice fees - making accountability even more crucial.

The Government's money grab: ILCA Consultation

Perhaps the most controversial development is the Ministry of Justice's urgent consultation on the Interest on Lawyers' Client Accounts (ILCA) scheme. The government proposes levying 75% of interest from general client accounts and 50% from designated deposits - even extending to third-party managed accounts.

Firms have just one month to respond to this consultation, which closes on 20th February. The proposals raise numerous technical questions: How will firms calculate "reasonable" client interest when 75% has already been claimed by government? Will new compliant accounting systems be required? What are the implications for firms using interest to subsidise pro bono work or other client services?

The Law Society has mounted a vigorous challenge to these proposals, and individual firms must add their voices to ensure government understands the practical implications.

Other key developments requiring attention

First-Tier Complaints: The Legal Services Board's decision on the SRA's proposed changes to complaints handling arrangements is expected imminently (by 11th January). Firms should prepare to update policies and procedures accordingly.

SSB Group Enforcement: The SRA has disqualified two non-solicitor directors of SSB Group for dishonesty and lack of integrity, whilst investigations continue into four solicitor directors. This action stands in stark contrast to the apparent inaction regarding lawyers involved in the Post Office scandal.

Digital Communications: A recent Senior Costs Judge ruling confirms that WhatsApp messages and other digital communications form part of a firm's file when charges are based upon them. Firms must maintain proper records of all billable digital communications.

Essential Actions for January 2026

1. Respond to the ILCA consultation by 20th February if your firm holds interest-bearing client accounts
2. Review your COLP arrangements in light of the thematic review findings
3. Monitor the LSB decision on first-tier complaints handling
4. Update firm-wide risk assessments following publication of the latest SARs Annual Report
5. Watch developments on AML supervision transfer whilst avoiding premature action

The regulatory environment continues to present significant challenges for law firms. Staying informed and taking timely action on these developments will be essential for maintaining compliance throughout 2026. Our next update will follow in February, but don't hesitate to reach out if you need specific guidance on any of these issues.

For more detailed analysis of these developments, including links to source materials, please refer to our webinar recording and supporting slides.

The compliance storm brewing: why 2026 will be a watershed year for UK legal services

As we close the books on 2025, the legal regulatory landscape appears deceptively calm. December's compliance update was notably quiet, but seasoned observers know this is merely the lull before what promises to be an unprecedented storm in 2026. For UK law firms, the coming year will demand fundamental changes in how they approach compliance, ethics, and professional responsibility.

The AML crisis deepens

The statistics are damning. Recent enforcement actions have resulted in half a million pounds in fines across 46 firms, with a deeply troubling pattern emerging: 76% of firms sanctioned for anti-money laundering breaches held the Conveyancing Quality Scheme (CQS) accreditation. This represents a significant increase from the 70% recorded just six months earlier in June.

This isn't simply a compliance failure; it's a credibility crisis for quality assurance schemes themselves. When three-quarters of sanctioned firms hold supposedly prestigious accreditations, we must question what these schemes actually certify. Compliant firms holding CQS are effectively competing on an unlevel playing field against non-compliant firms trading on the same logo and reputation.

The SRA's thematic review of source of funds checks reveals systemic failures: 11% of files showed no source of funds checks whatsoever, whilst 18% demonstrated inadequate scrutiny of documents. Perhaps most alarmingly, the review found firms that had been non-compliant for up to seven years, with compliance failures described as "persistent and widespread."

The FCA shadow looms

The impending transfer of AML supervision from the SRA to the Financial Conduct Authority represents a seismic shift. The FCA's reputation as a significantly more robust regulator should concentrate minds. Their message is clear: firms compliant now should have no problems after the transition. But current evidence suggests vast numbers of firms fall well short of this standard.

For the first time in recent memory, we're seeing enforcement action for facilitating money laundering - not merely procedural breaches. A solicitor who failed to spot red flags in a large transaction received a £15,000 fine and £35,000 in costs, with the tribunal stating he "effectively facilitated transactions that bore hallmarks of fraud and or money laundering." This marks a significant escalation in regulatory approach, and likely signals the direction of travel under FCA supervision.

Post Office scandal: the reckoning approaches

The Post Office Horizon scandal continues to cast a long shadow over the profession. With 53 people of interest under police investigation, including potential corporate manslaughter charges following 16 suicides - 2026 will see this scandal dominate headlines and regulatory attention.

The SRA has 20 live investigations underway, but questions remain unanswered. Where are the money laundering charges? The Post Office defrauded sub-postmasters of at least £36 million—textbook proceeds of crime. That money was laundered through the organisation to boost profits, salaries, and bonuses. Did law firms involved have reasonable grounds for suspicion? Did they seek defences from the National Crime Agency after the 2019 court ruling formally exposed the fraud?

These questions will define professional conduct debates in the coming year. The scandal will undoubtedly drive increased emphasis on mandatory ethics training - something the House of Lords Constitution Committee has already flagged as woefully inadequate both during and after qualification.

The AI conundrum

Artificial intelligence presents both opportunity and existential threat to traditional practice. Recent cases highlight the risks: AI-generated fake cases leading to wasted costs orders, with judges noting these failures stem from inadequate management and supervision, not individual solicitor error alone.

Major insurers including AIG, Great American, and WR Berkeley are retreating from comprehensive AI coverage, citing concerns around hallucinations, defamation, incorrect advice, and systemic errors. The liability question remains murky: is it the software developer, the AI model builder, or the law firm that bears responsibility when things go wrong?

Firms must urgently clarify their professional indemnity insurance position on AI claims. More fundamentally, they need policies addressing client use of AI. The phenomenon of clients presenting ChatGPT-generated challenges to legal advice is growing. Firms refusing to engage risk missing genuine errors, whilst those who do engage face uncompensated work and potential negligence claims if they don't adequately address AI-generated concerns.

Rising threats to practitioners

The Law Society has documented a significant increase in threats, intimidation, and physical violence faced by solicitors across practice areas. This isn't isolated; it's systemic and rising. Firms have legal obligations to protect staff, even when threats come from their most lucrative clients. Risk mitigation must become central to practice management.

The reform agenda

The Legal Services Board has launched a new consumer protection programme targeting volume litigation, consolidator firms, and unregulated providers - all areas where previous regulatory failures enabled catastrophic consumer harm. The timing is pointed: why only now, after SSB, Axiom Ince, and other high-profile collapses?

Meanwhile, the Ministry of Justice's report on the future of legal services suggests the sector may look "very different" within years. Discussion of reassessing reserved activities, supporting the "law tech revolution," and potentially restructuring regulation entirely signals fundamental change ahead.

Imperatives for 2026

Firms must act now on several fronts:

• Ensure AML compliance is genuine, not superficial. Don't rely on quality scheme accreditation as evidence of compliance - the statistics prove it's insufficient.
• Prepare for FCA supervision by treating current SRA requirements as the baseline, not the ceiling.
• Address AI systematically: secure appropriate insurance, implement clear policies on both firm and client AI use, and engage professional indemnity insurers on coverage.
• Protect your people from rising threats through proper risk assessment and mitigation.
• Verify Companies House identities for all relevant partners and directors - 5 million directors missed the November deadline.
• Update terms of business to reflect increased FSCS deposit protection limits: £120,000 standard protection and £1.4 million temporary high balance protection.

The quiet December belies the transformation ahead. Firms that treat 2026 as business-as-usual risk being left behind by regulatory change, technological disruption, and heightened professional accountability. Those who act decisively on compliance, embrace change thoughtfully, and maintain ethical standards will emerge stronger.

The question isn't whether fundamental change is coming to UK legal services - it's whether your firm will shape that change or be shaped by it.

The SRA's Statutory Duty Breach: A Regulatory Reckoning

The Legal Services Board has taken the unprecedented step of formally censuring the SRA for failing its statutory duty in relation to the SSB Group scandal. The Carson McDowell Independent Review concluded that the SRA breached four fundamental regulatory objectives under Section 1 of the Legal Services Act 2007.

This censure exposes a fundamental accountability gap in our regulatory system. When the regulator itself fails to meet its statutory obligations, who regulates the regulator? The answer should concern every stakeholder in legal services.

The SRA's failure to act decisively on SSB—despite clear warning signs—mirrors a pattern we've seen across multiple firm collapses. The question firms must now ask: if the regulator cannot be relied upon to identify systemic risks, what additional safeguards must we implement?

Resource: LSB SSB Report

The COLP Exodus: 5,354 compliance officers lost in five years

Between 2020 and 2024, 5,354 Compliance Officers for Legal Practice (COLPs) left their roles, that’s an average of 1,070 (11-12%) leaving their roles each year. Yet the SRA cannot explain why a single one of them resigned.

Questions the SRA Cannot Answer

• How many resigned due to conflicts with their firms?
• How many were dismissed for raising compliance concerns?
• How many current COLPs lack the authority to challenge leadership?
• How many COLPs have been restricted from holding the role in future?

The Structural Problem

The COLP system was designed to protect consumers by embedding regulatory accountability within firms. But when COLPs lack genuine authority or face pressure to remain silent, the entire framework collapses.

This data suggests a profession-wide problem with compliance culture. Firms must ask themselves: is our COLP genuinely empowered, or are we simply ticking a regulatory box?

Source: SRA FOI Response, October 2025 | Analysis by Brian Rogers, Access Legal

SRA Compliance Conference 2025: A day of reckoning

The October 2025 SRA Compliance Conference revealed an organization struggling with credibility following the SSB scandal. The atmosphere was described as one of "apologies, announcements, and audience anger."

Key Moments

Multiple apologies
The Chair apologised several times for SSB, acknowledging "the organisation could and should have done better"—though notably without any resignations or accountability for those responsible.

Thrown under the bus?
The Chair revealed "a number of top level departures" since the scandal, with implications that those who left are being blamed while she remains.

Who pays?
The SRA is recruiting more staff for enhanced focus, but funding will come through increased Practice Contribution (PC) fees—meaning the profession pays for regulatory incompetence.

The data paradox
The CEO claimed the SRA needs "more data," yet the Carson McDowell report demonstrated they had plenty of data but failed to "join up the dots."

The Bombshell
Chancellor Rachel Reeves announced the transfer of AML supervision from the SRA to the Financial Conduct Authority, stunning both the audience and even SRA staff who weren't informed in advance. This potentially represents a vote of no confidence in the SRA's competence.

The "Rubbish" moment
When audience members challenged the closing leadership session, someone shouted "rubbish" as the session concluded—a sentiment many agreed with even if not expressed.

The atmosphere
A profession that has lost patience with its regulator's explanations, excuses, and promises. After Axiom Ince and SSB, many believe something is "fundamentally wrong."

Resource: Conference Analysis

AML Compliance: The seven-year failure

The SRA's AML Annual Report 2024-25 reveals that after seven years of regulation, one-third of law firms remain totally non-compliant with money laundering requirements.

The shocking statistics

• 32.4% of firms remain totally non-compliant
• 151 total enforcement outcomes (vs 78 in 2023/24)
• £1.5M in total fines imposed
• £148M in suspected criminal proceeds identified

Top 5 compliance failures

1. 162 firms failed to perform client/matter risk assessments
2. 101 firms failed source of funds checks
3. 99 firms had inadequate policies & procedures
4. 65 firms had no firm-wide risk assessment
5. 19 firms still had no FWRA after 7 years

Conveyancing: The persistent risk

73% of SRA's Suspicious Activity Reports involved property conveyancing, with 16% of files having no client/matter risk assessment and 10% of files requiring source of funds having none completed.

The 7-year failure

Only 47% of firm-wide risk assessments were compliant—down from 60% last year. After seven years of regulation, compliance is declining, not improving.

Resource: SRA AML Annual Report 2024-25

CLC Risk Report 2025: Licensed conveyancers face similar challenges

The Council for Licensed Conveyancers' practice inspections paint a troubling picture, with 54% of inspected practices found non-compliant.

CLC inspection findings (Year to 9 April 2024)

• Totally Compliant: 4 practices (8.5%)
• Generally Compliant: 17 practices (37%)
• Non-Compliant: 25 practices (54%)

Main issues identified

• Undocumented Policies & Procedures (most common failing)
• Inadequate Client Due Diligence (CDD) Procedures (main issue)
• Inadequate Staff Training (common failing)

Over half (54%) of inspected practices were non-compliant, with CDD procedures being the primary concern.

Resource: CLC Risk Agenda 2025

AML Supervision Transfer: The FCA Takes Control

In a bombshell announcement at the SRA Compliance Conference, Chancellor Rachel Reeves revealed that AML supervision for legal services is being transferred from the SRA to the Financial Conduct Authority.

The Key Question

Will firms face criminal prosecution under FCA supervision?

The transfer fundamentally changes the stakes. Under SRA supervision, firms faced regulatory penalties. Under FCA supervision, they may face criminal sanctions.

Resource: AML Supervision Transfer Analysis

Mazur Ruling: The conduct of litigation crisis

The Mazur case has created urgent compliance challenges around who can conduct litigation. The Legal Services Board has launched a major review of past regulatory guidance.

The core issue

The Mazur ruling clarified that only authorised persons can conduct litigation, and that unauthorised team members cannot do so "even under supervision" of authorised persons. This narrow interpretation conflicts with years of regulatory guidance suggesting supervisory arrangements were acceptable.

LSB response

The Legal Services Board is now reviewing how all regulators and representative bodies have "ensured that information on conducting litigation was accurate and reliable" in the wake of the Mazur ruling.

Scope: All regulators and representative bodies
Focus: Information accuracy on conducting litigation

Law Society practice advice

The Law Society has published guidance clarifying which tasks those who are not authorised to conduct litigation are allowed to carry out.

Key requirement: A person must be authorised by the SRA or other approved legal regulator to conduct litigation. An unauthorised team member cannot conduct litigation, notwithstanding that they are an employee or manager of an authorised firm and/or working under the supervision of an authorised person.

Critical warning: "Tick-box" oversight from an authorised person will not be sufficient. Solicitors and firms must ensure their processes and records demonstrate that appropriately authorised persons are exercising their professional responsibility for key formal steps and strategic decisions in connection with proceedings initiated before the courts.

Resources:

• LSB Review Announcement
• Law Society Guidance

CILEx litigation rights: emergency response

In direct response to the Mazur crisis, CILEx Regulation has received LSB approval for standalone practice rights, effective immediately.

Who can apply: CILEx Fellows (Fellowship status required)
Direct communication: Members are being contacted
Application processes: Under review - capacity being maximized

Significant Increase in Applications Expected: Processes under review to maximize efficiency while maintaining standards.

Resource: CILEx Regulation Announcement

SRA first-tier complaints: new requirements for 2025

The SRA has published its response to a consultation on new first-tier complaints requirements, with implementation expected in November 2025 and data collection beginning in 2026.

Complaints information must now be provided:

• At conclusion of the legal matter
• Upon request at any time
• If a complaint is made during the matter

Complaints information on websites must be:

• Clear, accessible, and in a prominent place on firm websites
• Made available on request if no website exists

The LSB's definition of "complaint" has been added to the SRA Glossary for consistency: "An oral or written expression of dissatisfaction..."

SRA Warning to Firms:
"The way a complaint is made or the issue it raises should NOT determine whether it is recorded and dealt with under your complaints procedure."

Resource: SRA First-Tier Complaints Consultation Response

Conclusion: A profession at a crossroads

The last few months have laid bare the systemic weaknesses in legal services regulation. From the LSB's censure of the SRA to the persistent AML non-compliance affecting one-third of firms, the evidence points to a regulatory framework under severe strain.

The transfer of AML supervision to the FCA represents a fundamental shift from administrative compliance to criminal enforcement. The Mazur ruling has exposed gaps in authorisation that firms operated within for years based on regulatory guidance now deemed inadequate. The COLP exodus suggests compliance officers across the sector lack the authority or support to do their jobs effectively.

For compliance officers and firm leadership, the message is clear: regulatory expectations are tightening, enforcement is intensifying, and the cost of non-compliance—both financial and reputational—is escalating.

Firms that view compliance as a tick-box exercise will increasingly find themselves facing intervention, sanction, and public censure. Those that embed genuine compliance cultures, empower their COLPs, and proactively address emerging risks will navigate these challenges successfully.

The choice is yours.