Law Society warns of "regulatory creep" in the SRA's power to demand notifications

The argument is no longer whether the SRA should know more about what firms are doing. It is who decides what gets reported, and how often that list can grow.

The Law Society has objected to the regulator holding a broad power to require firms to notify it of events it prescribes from time to time, and to fixed financial penalties being used to enforce that regime.

What the SRA is proposing

Firms already have to tell the SRA about material changes to information previously supplied, but the obligation is not itemised. A June consultation proposed a rule allowing the regulator to prescribe specific notifiable events.

The first two on the list: notification once heads of terms are signed on a merger or acquisition, and notification when a firm starts holding client money.

The "enabling power" objection

The Society supports the objective of catching risk earlier. Its problem is the structure. It called the prescribed events rule "a wide enabling power with limited safeguards", raising questions of legal certainty and predictability and "the potential for regulatory creep".

It pointed to timing as evidence: "the SRA is already seeking to add a third notifiable event – relating to third-party litigation funding – before submissions to this consultation establishing a notifications regime have even closed."

Its preferred sequence is that the SRA first make better use of the substantial data it already holds, then consult with evidence behind each new requirement, rather than letting obligations accumulate incrementally without the scrutiny that primary rule changes attract.

Fixed penalties and the small firm problem

On enforcement, the Society said fixed penalties "may function as a blunt instrument that does not meaningfully distinguish between low-risk administrative failings and more serious compliance issues".

It also noted the SRA's own acknowledgement that financial penalties hit smaller firms harder, given thinner administrative capacity and less room to absorb regulatory cost.

Merger notification: right idea, wrong trigger

There is qualified support for treating M&A as notifiable, on the basis that deals can signal rising risk. What the Society disputes is the heads of terms trigger, which it does not accept is the most proportionate point, preferring a flexible risk-based test.

It likewise rejected a separate requirement to notify at least 30 days before completion, arguing fast-moving transactions need different arrangements, potentially including notification after the event.

The warning attached to that point is behavioural: "Poorly designed notification triggers or timeframes risk creating unintended behavioural and market effects, such as encouraging firms to delay, restructure or alter the timing of transactions or business decisions solely to manage regulatory obligations."

Client money: agreement with conditions

On the second proposed trigger the Society agreed that a firm beginning to hold client money marks a genuine change in risk profile that the SRA should learn about promptly and explicitly. That support, however, is conditional on safeguards and clarifications aimed at keeping the administrative burden proportionate.

What happens next

The consultation outcome will shape how much day-to-day reporting law firm COLPs carry from 2027 onwards. Firms with deals in the pipeline have the clearest interest: if the heads of terms trigger survives, transaction planning will need a regulatory notification step built in from the start.

Source: Legal Futures