SM&CR Shake-Up: FCA Unveils Major Phase 2 Reforms
Against a wider backdrop of Government and regulatory initiatives aimed at reducing unnecessary burdens on firms and making the UK regulatory framework more efficient and proportionate, reform of the Senior Managers and Certification Regime (SM&CR) has been a key area of focus.
Earlier this year, the Financial Conduct Authority (FCA) implemented Phase 1 of its SM&CR reforms, introducing a series of targeted changes intended to streamline the regime and reduce administrative burdens while maintaining strong standards of individual accountability. 1 These included changes to Senior Manager approvals, certification, regulatory references, the Directory and the thresholds for firms falling within the Enhanced regime.
The FCA has now moved to Phase 2, consulting on a broader and more substantial package of reforms. 2 The proposals go beyond simplifying existing processes and would reshape some of the core elements of the SM&CR, including which roles require FCA approval, the future of the Certification Regime and Directory, Prescribed Responsibilities and Conduct Rules requirements.
In this article, we look at the key changes already introduced through Phase 1 and summarise the FCA’s principal proposals for Phase 2, what they could mean for firms and the next steps in the reform process.
Phase 1: what has already changed?
Phase 1 was implemented through PS26/6: Senior Managers & Certification Regime review. Most of the changes took effect on 24 April 2026, with further changes following in July and September 2026.
The validity period was extended from three to six months, with checks no longer required for certain internal or intragroup moves.
Firms now have 12 weeks to submit an application for an individual temporarily performing a Senior Management Function (SMF), rather than having to obtain FCA approval within that period. The individual can continue acting while the application is being determined and will be subject to the Senior Manager Conduct Rules during that time.
Firms were given up to six months to notify the FCA of changes. Firms are only required to submit the latest version where multiple changes have occurred during that period.
The FCA clarified its expectations around annual fitness and propriety assessments, including that firms do not need to issue paper certificates and can incorporate certification into annual appraisal processes. The FCA also removed overlapping certification requirements, affecting approximately 15% of certification roles.
The deadline for updating most Directory information was increased from seven to 20 working days.
FCA guidance reduced the expected response time for regulatory references from six to four weeks.
Certain thresholds for entering the Enhanced SM&CR regime were increased by 30%, alongside a new mechanism for reviewing them periodically.
The rules were amended to provide greater flexibility around the allocation of responsibilities, including allowing SMF18 (‘Other Overall Responsibility’ function) holders at solo-regulated firms to hold any Prescribed Responsibility.
These changes were intended to reduce administrative friction without fundamentally altering the structure of the regime. Phase 2 is different.
Phase 2: a more fundamental overhaul
Under CP26/37: Senior Managers & Certification Regime Review: Phase 2, the FCA is proposing a significantly broader simplification of the regime. The scale of the ambition is significant: the Government, FCA and PRA have set an ambition to reduce the regulatory burden associated with the SM&CR by 50%, alongside a 40% reduction in the number of roles at banks and insurers requiring regulatory approval.
The proposals depend in part on legislative changes in the Financial Services and Markets Bill 2026, which would remove a number of prescriptive SM&CR requirements from legislation and give the regulators greater flexibility over the design of their rules.
Key proposals include:
The FCA proposes making SMF5 and SMF10-15 notified rather than approved functions, removing the FCA-only SMF18 and SMF22 functions, and narrowing the definition of SMF7 for solo-regulated firms.
The thresholds would be raised further so that fewer firms fall within the Enhanced SM&CR regime.
The current 12-week period would be increased to 18 weeks, and the existing "reasonably unforeseen" test would be replaced by a broader "reasonable use" test.
Firms would no longer have to submit updated Statements of Responsibilities or Management Responsibilities Maps to the FCA, although they would still need to keep them accurate and up to date internally. The FCA also proposes removing the requirement for a Statement of Responsibilities where one individual performs all of a firm's SMF roles.
The FCA proposes removing nine Prescribed Responsibilities. For Core and Enhanced firms, the remaining responsibilities would principally cover the Senior Managers Regime, financial crime and CASS, with an additional responsibility concerning outsourced internal audit applying to Enhanced firms.
One of the most significant proposals is to abolish the Certification Regime altogether, with the FCA instead relying on other Handbook requirements to deliver similar outcomes around competence and suitability. Associated regulatory reference requirements for formerly certified individuals would also be removed.
Alongside the removal of certification, the FCA proposes retiring the Directory of certified and assessed persons, including the associated reporting and attestation requirements.
The FCA proposes replacing current Conduct Rules training requirements with an obligation to notify staff of the rules applicable to them and the consequences of breach. For most non-SMF staff, the FCA also proposes raising the threshold for reporting Conduct Rule breaches so that reporting would generally only be required where disciplinary action results in a final written warning or dismissal. Existing reporting requirements would remain for SMFs.
What should firms be doing?
The proposals are likely to reduce some of the administrative burden associated with SM&CR, but they should not be viewed as a relaxation of the FCA's focus on individual accountability. The direction of travel is towards less prescription and administration, but not less accountability.
For firms, the practical impact will vary considerably depending on their existing SM&CR classification, governance arrangements, number and type of SMFs and Certified Persons, and the extent to which their HR and compliance processes have been designed around the current Certification Regime.
The proposed removal of the Certification Regime and Directory in particular raises important practical questions about how existing fitness and propriety, competence and workforce governance arrangements may need to evolve under the new framework. Firms should therefore start identifying those parts of their existing SM&CR frameworks that could be affected, but avoid making substantive changes until the final rules and implementation arrangements are known.
Simplification should not be confused with deregulation. Although some of the existing process and prescription may fall away, responsibility for ensuring appropriate standards of individual conduct, competence and accountability will remain.
Employment and HR implications
Firms should identify employment contracts and policies that expressly link employment or particular duties to regulatory approval or certification, and consider how these may need to change once the final rules are known. Recruitment, appraisal and training processes will also need to support continuing competence and suitability requirements without necessarily replicating the existing certification framework. The proposed higher threshold for reporting Conduct Rule breaches makes coordination between HR and compliance particularly important: disciplinary outcomes should remain fair and proportionate, irrespective of whether they trigger regulatory reporting.
What happens next?
The FCA's consultation closes on 22 January 2027.
The FCA expects to publish final requirements in a Policy Statement in the first half of 2027, with implementation currently proposed for around six months later, in the second half of 2027.
The proposals apply to firms already subject to the SM&CR, including third-country branches, and are also relevant to firms that are expected to come within the regime in future, including cryptoasset firms. Dual-regulated firms will also need to consider the PRA's parallel proposals in CP14/26.3
If you would like to understand how the Phase 1 changes or the proposed Phase 2 reforms may affect your business, or would like assistance assessing the potential impact on your existing SM&CR framework and governance arrangements, please get in touch with Sushil Kuner, Partner and Head of our Financial Services Regulatory Team.
Footnotes
[1] PS26/6: Senior Managers & Certification Regime review
[2] CP26/37: Senior Managers & Certification Regime Review: Phase 2
[3] CP14/26: Review of the Senior Managers and Certification Regime (SM&CR) – Phase 2
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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