For firm leaders, the regulatory signals arriving in mid-2026 are hard to read in isolation. The Legal Services Board (LSB) has been told it has "lost its way". The Solicitors Regulation Authority (SRA) is seeking a significant increase in its funding to strengthen its operations. And the government is preparing to strip anti-money laundering and counter-terrorist financing (AML/CTF) supervision from the professional bodies and hand it to the Financial Conduct Authority (FCA).
Taken together, they amount to a regulatory reset: more centralised supervision, greater use of data and intelligence, stronger gatekeeping, and closer scrutiny of whether firms can evidence that their controls are working effectively. They also carry higher direct and indirect costs.
None of this makes the FCA the general regulator of solicitors. The SRA keeps professional conduct, authorisation and wider regulation. Nor is the AML transfer imminent: legislation, funding and a detailed transition plan are all still to come. But an uncertain implementation date should not be mistaken for an absence of direction.
The key challenge for firms is to prepare for regulators that expect better management information, earlier identification of risk and clearer evidence of accountability. That will bite unevenly. A national practice may have a well-resourced compliance function but face complex data, governance and partner-approval demands; a five-partner high-street firm may have simpler structures yet far less capacity to absorb new fees, technology costs or regulatory requests. Proportionality will be one of the defining tests of the new regime.
The LSB review: a damning verdict
Richard Lloyd's independent review, commissioned by the Ministry of Justice and published in mid-July, concluded that the LSB had "lost its way in recent years", lacked strategic clarity and had failed to prioritise effectively among its statutory objectives. Most seriously, its oversight of frontline regulators had fallen short of what government and Parliament could reasonably expect, with the consequence that consumers had not been as well protected as they should have been.
The problem was not the people involved but that the LSB had spread limited resources across too broad a programme without connecting activity to measurable outcomes. His remedy was to direct most of the LSB's resource towards consumer protection through stronger oversight of frontline regulators and the Office for Legal Complaints, and to stop work that could not demonstrably support that role.
The ten recommendations include a more preventive, proportionate and risk-based supervisory model; better use of data and intelligence; less duplication between regulators; and a clearer separation of the LSB's enforcement and performance-oversight functions from its policy and engagement work. The LSB, frontline regulators and the MoJ should also develop a shared framework for identifying and managing consumer and market risk.
The review was careful to define consumer detriment broadly: not only misconduct or firm failure, but people unable to obtain affordable advice, secure effective redress or understand their rights. Equally, a zero-risk system would stifle competition and access, the aim is to mitigate serious risks, not make legal services risk-free.
For the longer term, Lloyd recommended a comprehensive government review of legal-services regulation, with a new framework developed by 2029 and implemented in the next Parliament, including reconsideration of which activities sit inside the regulatory perimeter. The existing structure is not to be put on hold while that work proceeds.
LSB chair Monisha Shah, in post only since earlier this year, accepted that regulatory failures had caused "significant consumer detriment" and said the report provided the basis for a "major reset". The LSB intends to replace its decade-long strategy with a focused three-year plan and to separate enforcement and oversight from policy and engagement. The Law Society welcomed the renewed emphasis on the LSB's core oversight role while warning against duplicating work better done by frontline regulators. The government has promised a formal response.
For firms, the practical point is that stronger oversight at board level is intended to drive further improvements across the sector, with frontline regulators expected to demonstrate proactive supervision, timely intervention and measurable consumer outcomes.
AML supervision moves to the FCA
The government confirmed in October 2025 that the FCA would become the single AML/CTF supervisor for legal and accountancy service providers and trust and company service providers. HM Treasury's June 2026 consultation response, on the duties, powers and accountability the FCA will need, supplies much of the proposed machinery.
At present, 22 professional body supervisors oversee the legal and accountancy sectors, with the FCA's Office for Professional Body Anti-Money Laundering Supervision (OPBAS) supervising their performance. The case for consolidation rests on fragmentation, inconsistent gatekeeping and variable enforcement; OPBAS's own assessments have pointed to broadly maintained or improving standards among the bodies it reviews while remaining less assured about the robustness of supervision and enforcement. The FCA's supervised population will expand by tens of thousands of professional-services firms.
Under the new model, firms undertaking activity within the Money Laundering Regulations 2017 will register with the FCA, which will maintain a public register intended as a single authoritative record of which businesses may lawfully carry out in-scope work.
Fit-and-proper testing will be extended to legal and accountancy providers, allowing assessment of the integrity, competence, criminal history and compliance record of firms and their beneficial owners, officers and managers. Existing professional-body checks may be relied on where appropriate, but the breadth of the population creates an obvious administrative burden, particularly for large partnerships with many relevant role-holders.
The FCA will be able to deploy information requests, inspections and thematic reviews, and to appoint skilled persons to investigate firms' controls, subject to a reasonableness safeguard. Those skilled-person reviews are potentially significant: even where no breach is established, the exercise can be resource-intensive and costly for the firm.
Existing MLR enforcement powers will apply, financial penalties, public censure, prohibitions on senior managers, removal of registration and, in serious cases, criminal proceedings, and Treasury intends to consult on a streamlined process for minor failures such as late registration. Appeals remain subject to tribunal and judicial oversight. The response stresses that these are principally extensions of existing MLR powers, not a wholesale importation of the FCA's Financial Services and Markets Act regime.
Responsibility for producing and approving AML guidance will pass to the FCA, with industry input promised. Legal professional privilege remains protected: the FCA will not be able to compel production of privileged material through its MLR information powers, and further guidance is expected on inspections, redaction and disputed claims. The government has, for now, declined to require suspicious activity reports to be shared directly with supervisors.
The timetable is deliberately open. Implementation depends on enabling legislation, funding and a transition plan, and will turn on parliamentary time; the government's stated ambition is for the FCA to take up the role before the end of the decade. OPBAS will continue during the transition and then close. The SRA, meanwhile, remains the competent authority, and its existing AML duties and enforcement continue in full during the transition.
Future FCA supervision will be funded by fees on supervised firms on a cost-recovery basis, but the structure is not yet settled. Firms must therefore plan for an additional regulatory cost of presently unknown size. The Law Society opposed the chosen model, citing the risk of losing sector expertise, duplicating regulation and mishandling privilege; it has nonetheless committed to working with the FCA, and insists that practitioner-led input into legal-sector guidance must continue.
SRA funding and investment in supervision
The SRA's draft 2026/27 plan proposes a funding requirement of £111.5 million, up £25 million, or 29%. Its portion of the individual practising certificate fee would rise from £190 to £240. Individuals provide 40% of practising-fee funding; the remaining 60% is charged to firms on turnover bands. Chief executive Sarah Rapson, who arrived in November 2025, has framed the plan as an investment to strengthen the regulator's foundations and move from reactive case-handling to earlier, intelligence-led supervision, a shift the SRA says it must make while "dual running" ordinary regulatory work alongside its own transformation. The scale of demand is a factor: the number of misconduct reports it assesses rose by 45% to around 16,500 between 2022 and 2025.
The Compensation Fund is a second factor. Higher claims on the fund, including those following the closure of PM Law in early 2026, are set to push its annual levy from £26 million last year to a proposed £46.3 million in 2026/27.
The SRA initially proposed raising individual Compensation Fund contributions from £70 to £120 and firm contributions from £1,950 to £3,600. Following consultation, it shifted the split from 50:50 to 70% from individuals and 30% from firms, producing a revised £170 per solicitor, a 143% rise, and £2,170 for a firm holding client money, up 11%. Both remain subject to LSB approval. If approved alongside the £240 practising-fee component, the SRA-related individual total reaches £410, against £260 in 2025/26, and that is before the Law Society and other levies that make up the final renewal bill.
The redistribution helps many smaller employers. A firm with eight solicitors whose contributions it pays would face Compensation Fund costs of £3,530 under the revised split, rather than £4,560 under the original, though still £1,020 more than under the present arrangement. Around two-thirds of firms, the SRA says, will pay less than they would have under a 50:50 model. The Law Society accepted the case for investment but pressed for measurable improvement, greater transparency and consideration of targeted relief for legal-aid practices, and had opposed shifting more of the burden onto individuals. That last point endures: affordability for firms and affordability for employed solicitors are not the same question.
Broader implications for firms
One practical issue is regulatory overlap. After the transfer, an AML matter could engage both the FCA under the MLRs and the SRA where the same facts raise conduct concerns. Treasury proposes cooperation and information-sharing between the two, with the detail to be worked out in practice.
Smaller conveyancing, private-client and corporate practices will feel the change most, because much of their work falls within the MLRs while compliance may rest with a single partner already carrying a full caseload. Fixed levies, future FCA fees and external advice can consume a meaningful share of profit. Mid-sized firms may be best placed to gain from investment in integrated onboarding and matter-risk systems, provided they achieve consistency across offices and departments. Large firms can absorb the direct fees more comfortably but may face more complex fit-and-proper assessments, group structures and cross-border data issues; the revised 70:30 split also loads more of the aggregate Compensation Fund burden onto larger employers that pay individual contributions.
There is opportunity in this. Firms that integrate compliance data with operational management can spot dormant matters, unusual client-account activity, inconsistent risk ratings and delayed due-diligence reviews earlier. Good compliance technology should cut repetitive work and support better decisions; poorly configured technology merely produces more data, and sometimes false reassurance.
What the reset asks of firms
Firms do not need to predict the FCA's final rulebook. What they need are controls that will hold up under any credible risk-based regime, and the sensible groundwork is already identifiable.
The starting point is to map the regulatory perimeter: which services fall within the MLRs, which entities deliver them, and who holds beneficial-owner, officer, manager, MLCO and MLRO responsibilities, recording where FCA registration or approval may eventually be needed. From there, the emphasis should fall on effectiveness rather than documentation. A firm-wide risk assessment and a shelf of policies count for little if files do not bear them out; sampling completed and live matters, across customer due diligence, source-of-funds and source-of-wealth work, ongoing monitoring and SAR decision-making, is the only reliable test of whether policy is followed.
Better management information follows naturally. Firms will increasingly be expected to report on high-risk clients and matters, overdue reviews, exceptions, rejected work, SARs, training and file-testing results, and to have partners who can explain what that information shows and what action followed. People and records deserve the same attention: the data held on relevant owners and managers, including regulatory history and competence, will matter under an extended fit-and-proper regime, and training should be tailored, since reception, accounts, fee earners, supervisors and senior management meet different risks.
Two further disciplines are worth building now. Privilege should be handled through a clear protocol for responding to information requests and inspections, identifying potentially privileged material and escalating disputed cases, so that it is protected carefully rather than asserted indiscriminately. And budgeting should be modelled under several scenarios: the revised SRA charges taking effect at the October 2026 renewal, higher turnover-based firm fees, training and system costs, and a contingency for future FCA fees or external reviews. Smaller firms in particular should model the cash impact per solicitor, not just the headline firm levy. Throughout, someone should own the task of tracking Treasury legislation, FCA consultations and SRA communications; until the transfer completes, firms must continue to meet SRA data requests and current guidance.
A reset firms cannot ignore
The direction of travel is towards more consistent, data-led and interventionist regulation, but also towards a system that claims to be more proportionate and focused on genuine risk. Whether it strikes that balance will depend on implementation.
The profession will rightly look for value from the substantial additional sums it is being asked to contribute. The LSB will need to show stronger oversight, the SRA to turn its investment into better decisions and earlier intervention, and the FCA to preserve sector expertise and privilege while avoiding needless duplication. But firms cannot wait for institutional reform to finish. Those that can demonstrate clear ownership, accurate data, effective controls and reasoned decisions will be better placed under either supervisor. The most resilient response is not regulatory prediction but stronger governance: knowing where the risks lie, who is responsible for them, and whether the firm can prove its safeguards work.
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