Law firms could face new reporting rules on mergers

Ellie Nicholl (she/her) is senior content and engagement coordinator at LawCareers.Net

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Law firms may soon have to notify the Solicitors Regulation Authority (SRA) earlier in the merger process, under proposed rules aimed at identifying risks in fast-growing firms.

On Friday 19 June, the SRA launched a consultation on whether firms should flag planned mergers or acquisitions once they reach the heads of terms stage, giving it earlier visibility before deals are finalised.

The move follows the collapse of accumulator firms such as Axiom Ince and PM Law, where client money went missing.

The SRA stressed that the proposal is a notification requirement rather than an approval process. Firms would also be expected to inform the regulator when they begin holding client money.

Currently, firms must notify the SRA within 28 days if it’s closing following a merger or acquisition, and any change in ownership must also be reported. However, there’s no requirement to inform the regulator in advance of a potential deal or provide information to support a risk assessment.

Under the proposed changes, firms would be required to disclose key details earlier in the process, including:

• turnover;
• client money holdings;
• areas of practice for both the acquiring and target firms;
• expected completion date;
• recent acquisition activity; and
• information on the post-merger structure.

SRA executive director of strategy and policy Aileen Armstrong said: “Having the right information at the right time is important to help us to proactively identify risks earlier and, if necessary, act on them to prevent harm, including the loss of client money.”

The SRA stated that there’s a strong case for “fundamental, transformational reforms” to how client money is held and how redress is funded. However, it acknowledged that these are complex issues that will take time to resolve, with more immediate measures taking priority in the short term. These include improving oversight of firms that significantly change their profile through sales, mergers or acquisitions. The regulator also confirmed that a further consultation is expected on how firms notify it about the use of third-party litigation funding.

SRA CEO Sarah Rapson has previously said the regulator needs to move towards a more intelligence-led, proactive supervision model. However, the SRA has acknowledged gaps in its understanding of the sector, noting it typically only collects information at the authorisation stage or through annual returns.

It also admitted it hasn’t historically gathered data for the purpose of understanding risk patterns or tracking changes in firms’ risk profiles.

The consultation is set to close on 17 August.

Read this comprehensive guide to discover more about law firm mergers.