Legal Compliance Update

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.

This month's update covers three significant developments affecting legal practice: the High Court's Mazur ruling on litigation conduct, the SRA's revised approach to client account reform, and proposed changes to Money Laundering Regulations that could fundamentally alter how firms manage client confidentiality.

The Mazur Case: Clarifying Who Can Conduct Litigation

The High Court has ruled that unqualified employees of law firms can support solicitors in conducting litigation, but cannot themselves conduct litigation, even under supervision. This distinction has created significant uncertainty across the sector, particularly among senior qualified non-solicitors who have been conducting litigation for years.

The debate centres on interpretation of the Civil Procedure Rules and the Legal Services Act 2007. The late Andrew Hopper QC, widely regarded as the leading authority on legal services regulation before his death in 2018, previously expressed the view that unauthorised individuals could conduct litigation under appropriate circumstances.

The SRA's Position

Following initial silence that frustrated many practitioners, the SRA has now clarified its stance:

"The judgment did not change the position in law that the Legal Services Act makes it clear that only regulated individuals can conduct litigation as it is a reserved legal activity. Non-authorised individuals can support litigation – as they do in other areas – but only an authorised individual, such as a solicitor, should be conducting litigation."

The SRA acknowledges this differs from guidance provided to at least one firm in December 2024, though it aligns with earlier 2022 guidance.

Crucially, the SRA states: "There is a distinction between conducting litigation and supporting litigation, but the boundary between the two activities will depend on the facts. Being engaged (whether as an employee or other contractor) by an authorised person who is permitted to conduct reserved activities does not automatically confer a right to conduct litigation on an employee or contractor who is not authorised."

What This Means for Firms

The onus falls squarely on firms to satisfy themselves that only authorised individuals are conducting litigation. The SRA recommends documenting your decision-making around supervision arrangements in accordance with their published guidance.

A Senior Costs Judge has already reported that Mazur has been cited in proceedings, raising concerns about potential legal professional privilege complications when these arguments arise.

Next Steps

Whether this decision will face judicial review or other legal challenge remains to be seen. In the meantime, COLPs should:

• Review current litigation handling arrangements
• Identify which staff members are conducting versus supporting litigation
• Document supervision arrangements and decision-making processes
• Consider whether role descriptions and delegation arrangements require revision

SRA Statement on Client Account Reform

Following its consultation on the future of client accounts, the SRA has announced a significant shift in approach:

"Our immediate focus is on making changes to better protect and safeguard client money under the current system. We then plan to return to the longer-term questions of solicitors holding client money and the compensation fund after we have made changes to the current system, when we can give them the robust consideration they need."

Context and Timing

The original consultation appeared to be prompted by the Axiom Ince scandal, where the SRA faced substantial criticism for its regulatory oversight. The regulator's decision to defer fundamental questions about whether solicitors should hold client money at all suggests these complex issues require more thorough consideration than initially anticipated.

The SRA will continue working with stakeholders before returning to longer-term reforms. This phased approach may provide welcome breathing space for firms already managing multiple regulatory changes.

What Firms Should Monitor

COLPs and Finance Partners should watch for the SRA's proposals on immediate safeguarding improvements to current client account arrangements, likely to emerge in the coming months.

Draft Money Laundering Regulations: Confidentiality Concerns

Proposed amendments to the Money Laundering Regulations have clarified—and intensified—concerns about how client due diligence information will be shared with banks operating client accounts.

The Key Change

The draft regulations would require firms to provide details of their 'underlying clients' to banks upon request when managing pooled client accounts (PCAs). Significantly, the draft contains a provision stating this disclosure would not breach 'any restriction, however imposed, on the disclosure of information'.

The Fundamental Issue

This provision raises serious questions about whether firms can reconcile:

• The duty of confidentiality central to the solicitor-client relationship
• Legal professional privilege obligations
• The proposed duty to disclose client information to banks

The Law Society's Response

The Law Society has expressed strong concerns, stating the changes:

"...could cause 'significant and uncertain compliance burdens' for law firms. The changes 'do not enhance the effectiveness of efforts to combat money laundering' and went against the government policy of reducing unnecessary and ineffective compliance burdens."

The Society warns that "the provisions relating to the banking sector are so widely drawn that they are likely to have serious unintended consequences for many in the legal profession."

Most significantly: "The proposals risk being both unfair and unworkable, potentially displacing legal services through removal of PCA services and thereby restricting access to legal services."

What MLROs Should Do Now

• Review your firm's current PCA arrangements and bank relationships
• Begin scenario planning for potential changes to client account operations

HMRC Tax Adviser Registration: Impact on Conveyancers

A development requiring immediate attention: HMRC's requirement for tax advisers to register and meet minimum standards from 1 April 2026 may capture conveyancers who handle Stamp Duty Land Tax matters.

The Scope Question

It remains unclear whether simply submitting SDLT returns through the HMRC portal on behalf of clients will trigger the registration requirement. This ambiguity creates genuine uncertainty for conveyancing practices.

An Emerging Trend

Reports suggest some solicitors are now declining to provide tax advice or are terminating retainers where clients request such advice, following heightened scrutiny of property tax matters in recent months.

Action Required

Conveyancing practitioners and COLPs should:

• Monitor HMRC guidance as the April 2026 implementation date approaches
• Review retainer letters and scope of service provisions
• Consider what level of SDLT involvement your firm provides
• Prepare to adjust service offerings or seek registration if required
• Watch for clarification from representative bodies

The distinction between submitting returns as an administrative function versus providing tax advice may prove crucial.

 

 

Summary: Key Actions This Month

For COLPs:

• Audit litigation handling arrangements following Mazur
• Document supervision decisions comprehensively
• Monitor SRA announcements on client account safeguards

For MLROs:

• Review MLR consultations and consider responding
• Assess vulnerability to potential PCA banking changes
• Discuss implications with your finance team and banking partners

For Conveyancers:

• Track HMRC guidance on tax adviser registration
• Review SDLT service scope in retainers
• Plan for potential service adjustments by April 2026

These developments collectively represent substantial potential changes to how legal services operate. Firms should engage actively with consultations and ensure compliance frameworks remain flexible enough to adapt as these positions clarify.