The Phase 2 SMCR Reform Consultations have landed! Last week, the FCA published CP 26/37 and the PRA published CP 14/26 which include substantial proposals which would result in wholesale changes to the SMCR. These would also undo many of the changes implemented as part of the Phase 1 SMCR Reforms which came into force earlier this year (which we summarised here).
We welcome these proposals as a real step forward in the UK's regulatory simplification agenda and in supporting the competitiveness of the UK's financial services sector. In her Mansion House speech which launched the Consultation Papers, PRA Chief Executive Katharine Braddick placed the reforms within the PRA's wider growth agenda, describing the proposals as "halving [the SMCR's] regulatory burden on firms whilst retaining clear accountability of their senior leaders". We think this is the right balance: preserving the individual accountability at the heart of the SMCR while removing processes that impose administrative burdens on firms. For some time, we have highlighted the practical difficulties firms face under the existing regime, and we think these proposals offer a welcome opportunity to address them more fundamentally. In particular, we expect firms will welcome notification in place of pre-approval for selected SMF appointments, the proposed longer cover window with the new 18-week rule, removal of the Certification Regime and more targeted reporting requirements. There is still detail to work through, but we think the overall direction is positive.
We have set out further details of the proposals below, together with some of our initial thoughts on these, but in summary the key proposals in the Consultation Papers are as follows:
Notification instead of approval for selected SMFs: for dual-regulated and solo-regulated Enhanced firms, certain roles would move from pre-approval to notification. These include SMF5 (Head of Internal Audit), SMF10 (Chair of the Risk Committee), SMF11 (Chair of the Audit Committee), SMF12 (Chair of the Remuneration Committee) and SMF14 (Senior Independent Director). The PRA would also include SMF6 (Head of Key Business Area) and certain insurance-specific roles. Firms would remain responsible for vetting appointees, and notified SMFs would remain subject to the Duty of Responsibility and Senior Manager Conduct Rules. Separately, the FCA would remove SMF18 (Other Overall Responsibility) and SMF22 (Local Responsibility), with their responsibilities needing to be reallocated, and narrow SMF7 (Group Entity Senior Manager) to individuals exercising significant influence who hold specified senior group roles. The PRA would instead split SMF7 into approved SMF7 and the new notified SMF7a roles, keeping the existing population within the regime.
Fewer Prescribed Responsibilities ("PRs"): the FCA would remove nine PRs, retaining only PR(a) (the Senior Managers Regime), PR(d) (financial crime) and PR(z) (CASS), together with PR(j-3) (oversight of outsourced internal audit) for Enhanced firms. The PRA would also reduce its list, including removing PRs relating to MRMs and the training and induction of the governing body and senior management, but would retain a broader set than the FCA. PR(a), which concerns responsibility for the firm's compliance with the Senior Managers Regime, would be clarified to cover vetting SMF candidates, notifications and applications.
The 12-week rule becomes an 18-week rule: both regulators would extend the period for submitting an SMF application or notification from 12 to 18 weeks. The FCA would replace the "reasonably unforeseen" requirement currently applicable when relying on the 12-week rule, which firms have found difficult to apply in practice, with a "reasonable use" test. The PRA would retain the "reasonably unforeseen" requirement - dual-regulated firms could therefore face different tests for FCA and PRA functions, although the FCA is also consulting on retaining the existing test for all functions at dual-regulated firms to avoid this potential mismatch. Non-SMFs providing temporary cover would still not be permitted to hold PRs.
Less routine reporting of responsibilities: firms would no longer need to submit revised Statements of Responsibilities ("SoRs") and, where applicable, Management Responsibilities Maps ("MRMs") to the PRA/FCA following significant changes in responsibilities. These documents would still be required for SMF applications and notifications, and firms would need to keep internal versions up to date and available on request. The FCA proposes retaining superseded versions for six years for most firms, or ten years for certain dual-regulated firms. Firms in which a single individual performs all SMF roles would no longer need to maintain SoRs or MRMs.
Removal of the Certification Regime: both regulators propose removing the requirements to identify certification functions, assess fitness and propriety on recruitment and annually thereafter, and issue certificates, without a like-for-like replacement. Firms would nevertheless remain responsible for staff competence, suitability and conduct under wider regulatory requirements and employment processes. The FCA would retire the Directory, ending submissions, updates and annual attestations.
Removal of regulatory reference requirements for certified persons: regulatory reference requirements associated with certified roles would fall away, but references would remain for approved and notified SMF appointments and certain other senior roles. This marks a significant change in direction by the regulators a decade after the Fair and Effective Markets Review ("FEMR") highlighted concerns about "rolling bad apples", with the proposed rules appearing to be less onerous than those in place before FEMR.
Lighter-touch Conduct Rules processes: the Conduct Rules themselves would remain unchanged (including the new non-financial misconduct rule and guidance), but mandatory training would be removed. The FCA would instead require firms to notify staff of the applicable rules and the consequences of breach. FCA reporting for SMFs would remain unchanged; for temporary SMF cover-holders and non-executive directors, relevant breaches would all be reported within seven business days. For other staff, only breaches resulting in a final written warning or dismissal would be reportable, with annual reporting replaced by notification within 14 months of the disciplinary action and only the final outcome reported after any appeal. The PRA's changes would be narrower: for staff previously within its Certification Regime, "final written warning" would replace "formal written warning" as a reporting trigger, but suspension, dismissal and remuneration-related triggers would remain, as would seven-business-day reporting.
Other changes: the FCA would raise the consumer credit, asset manager and intermediary thresholds for Enhanced status by around 50%, including increasing the assets-under-management threshold from £65bn to £100bn, and replace the Significant SYSC test for wholesale markets firms with a £750m assets-based threshold. We do expect this will result in a number of firms falling below the Enhanced firm thresholds, particularly on the asset management side, which could result in a simplification of the regulatory burden for these firms. Both regulators would simplify application materials, including removing duplicative attachments such as handover summaries, and move forms out of their rulebooks to make updates easier. Firms could also request time-limited or conditional approvals without the statutory notice process, offering greater flexibility for interim appointments without lowering the applicable standards.
Both Consultations close on 22 January 2027, with final rules expected in H1 2027 and implementation in H2 2027.
We will be hosting a webinar on these changes on Thursday 29 October - please sign up here. We are also planning a roundtable to discuss the proposals and the key points for firms' responses - we will follow up with further details shortly.
In the meantime, we would love to hear your thoughts on the proposals - please do reach out to Penny Miller (Partner), Andrea Finn (Partner), Amy Sumaria (Managing Associate) and Alannah Mansfield (Supervising Associate).
1. SMF notification, rather than approval (dual-regulated and Enhanced firms only)
Which roles would be subject to notification rather than approval? Both regulators would move certain oversight and assurance roles from pre-approval to notification: SMF5 (Head of Internal Audit), SMF10 (Chair of the Risk Committee), SMF11 (Chair of the Audit Committee), SMF12 (Chair of the Remuneration Committee) and SMF14 (Senior Independent Director), with the PRA also including SMF6 (Head of Key Business Area) and certain insurance-specific roles. The FCA expects around 15% fewer SMF applications from solo-regulated Enhanced firms, and the PRA more than 40% fewer.
How would notification work? Firms would still need to complete the usual fitness and propriety assessment and checks (including regulatory references and criminal records checks) and prepare a SoR. However, the notification itself would be simpler and would only require production of the individual's details, confirmation that vetting and the F&P assessment are complete, and submission of the SoRs/MRMs. Firms would be able to submit a notification up to three months before the individual's start date. Once a notification is submitted, the FCA would carry out only limited automated checks (essentially, that the form is complete and the individual is not prohibited), and the notification would take effect on the later of acknowledgement of receipt and the start date. The regulators also include certain transitional provisions around when the notification procedure would switch on. The regulators do retain the ability to require pre-approval for a notified role in exceptional circumstances, for example, where they have serious concerns about a firm's governance or its ability or willingness to vet notified SMFs, or where the role is particularly important to the firm's safety and soundness, although they consider this will be used rarely.
What does being a notified SMF mean? The same requirements and expectations will apply to notified SMFs as for approved SMFs. Notified SMFs would still be vetted before appointment, remain subject to the Duty of Responsibility and the Senior Manager Conduct Rules, and appear on the Financial Services Register, which would distinguish notified from approved roles.
What happens to SMF7? Both regulators would focus approved SMF7 status on group individuals who exercise significant influence over the firm and hold one of a core set of senior group roles: broadly, chief executive, finance, risk, operations, compliance, MLRO and board chair. The approach then deviates. Under the FCA's proposals (solo-regulated Enhanced firms), anyone who exercises significant influence but does not perform one of the specified functions would fall out of the Senior Managers Regime altogether. Firms would need to reassess existing SMF7s and withdraw anyone outside the new definition, which the FCA expects to shrink the solo-regulated SMF7 population by around 40%. Under the PRA's proposals (dual-regulated firms), SMF7 would be split in two: those whose group role corresponds to those PRA or FCA pre-approved functions would remain approved SMF7s, and all others would become notified SMF7a holders, staying inside the regime but without pre-approval. The PRA does not intend this to change or expand the current SMF7 population, and expects it to be most relevant to SMF7s in branches or subsidiaries of overseas banks. The FCA has chosen not to create an SMF7a equivalent, to stay consistent with removing SMF18 and SMF22 (as noted below). We do think the SMF 7 / SMF 7a distinction for dual-regulated firms does have the potential to increase complexity and we're not clear from the Consultation Paper why the PRA has not followed the FCA's approach here.
Goodbye SMF18 and SMF22? The FCA proposes removing the SMF18 (Other Overall Responsibility) and SMF22 (Local Responsibility) roles altogether, rather than moving them to notification. Its concern is that these catch-all functions are used so extensively that individuals are being approved as Senior Managers in roles never intended to be SMFs: SMF18 accounts for 19% of applications at solo-regulated Enhanced firms, and SMF22 for 24% at dual-regulated branches. The FCA acknowledges that this removal would significantly change how responsibilities are allocated and documented, given that responsibilities currently allocated to individuals in these roles would need to be reallocated. However, there is no proposal to remove the "no gaps principle", so the removal of these roles would result in other Senior Managers taking on more responsibilities. Some firms may wish to consider how the proposed removal of SMF18 would work alongside the continuing no gaps principle, particularly in larger organisations with complex management structures. For those firms, the use of SMF18 may reflect valid reasons for allocating responsibilities in a way that matches their management structure. It will be worth considering how those responsibilities could be reallocated to the CEO or other existing SMFs while continuing to reflect how the firm operates in practice. This may be an area where firms wish to provide feedback on whether retaining some flexibility would be helpful.
What isn't changing? All other SMFs, including all those applicable to Core SMCR firms, would remain subject to pre-approval. Perhaps unsurprisingly given the FCA's focus on AI (including last week's publication on AI in financial services), the SMF24 role (Chief Operations/Operating Function) would remain subject to pre-approval, in light of increasing AI and cyber-related operational risks. The regulators will keep notification under review: if it works well, it could be extended to other roles; if firms make unsuitable appointments, the FCA may consult on reintroducing pre-approval. We do wonder whether there could be scope to extend the ability to use this notification route, for example whether this could be used for previously assessed individuals who are applying for the same / a similar role in a new firm, rather than requiring pre-approval.
2. Removal of certain PRs
Which PRs would be removed? Recognising that the current list may be longer than needed, both regulators propose removing certain PRs. The FCA would remove nine, leaving only PR(a) (the Senior Managers Regime), PR(d) (financial crime) and PR(z) (CASS), plus PR(j-3) (oversight of outsourced internal audit) for Enhanced firms. The PRA would also remove some PRs (such as those relating to the MRM and the training and induction of the governing body and senior management), but would retain a longer list. For dual-regulated firms, it may be that some of the PRs which the PRA suggests it will retain could also be removed, for example, PR(ff) (responsibility for the firm's compliance with the UK regulatory system as applicable to the firm). There's also no mention of removal of the "quasi-responsibilities" that have been created via regulatory publications over the years.
Do firms need to recreate deleted PRs elsewhere? Generally not. The FCA says firms should not recreate a deleted PR as an "overall", "local" or "other" responsibility where it is already inherent in the SMF role. That is welcome: deleting a PR only to retype it elsewhere would defeat the point.
What changes for the PR(a) holder? The regulators would amend PR(a) to clarify the holder's duties in relation to vetting SMF candidates, SMF notifications and SMF applications. With no routine regulatory assessment of notified appointments, this would place greater responsibility on the PR(a) holder in relation to SMF appointments.
3. 12-week rule becomes the 18-week rule
How long is the new cover window? Both regulators propose extending the period to submit an application or notification from 12 to 18 weeks. We expect firms to welcome this extension.
What replaces the "reasonably unforeseen" test? Currently, the 12-week rule can only be used to provide cover for a Senior Manager whose absence is temporary or "reasonably unforeseen", which we're aware firms have found inflexible and difficult to operate in practice. The FCA proposes to remove the "reasonably unforeseen" requirement, instead replacing this with "reasonable use" requirements, meaning firms should use the rule only where needed, as infrequently and for as short a time as reasonably possible. We think removing "reasonably unforeseen" is helpful for firms and offers support to firms when managing changes in senior management. It's worth noting however that non-SMFs providing cover under the rule would still not be permitted to hold PRs, and the FCA would add guidance that, where an absent SMF's responsibilities are reallocated, the firm's records should clearly show who holds them, even temporarily. Given the proposal to remove the requirement to submit significant changes to the SoRs (see below), it may be that this is less burdensome, although firms would still be required to ensure that their internal SoRs accurately reflect the allocation.
Is the PRA taking the same approach? No. The PRA would retain the "reasonably unforeseen" requirement for dual-regulated firms, so the FCA's "reasonable use" test would apply only to FCA functions in those firms. Recognising that this may add complexity, the FCA has proposed an alternative - remove the requirement only for SMF roles in solo-regulated firms and retain it for dual-regulated firms (i.e. dual-regulated firms would only apply the "reasonably unforeseen" test). We think this misalignment could risk adding complexity for firms, especially where there are both solo-regulated and dual-regulated firms in the group.
4. Statements of Responsibilities and MRMs
What changes for SoRs and MRMs? Both regulators would remove the requirement to submit SoRs (and, where applicable, MRMs) following significant changes in responsibilities. SoRs and MRMs would still accompany SMF applications, and firms would need to keep internal versions up to date so that current and past SoRs can be provided on request. This meaningfully reduces reporting, but firms will still need clear ownership, version control and an audit trail.
How long do records need to be kept? The FCA proposes keeping each superseded version for six years for most firms, or ten years for certain dual-regulated firms, in line with the PRA. The clock runs from when a version is superseded, and current and retained versions must be available immediately on request.
What if only one person performs SMF roles? Both regulators propose that firms where a single individual performs all SMF roles (even several of them) would no longer need to maintain SoRs or MRMs.
5. Removal of the Certification Regime
What would go? Both regulators propose removing the Certification Regime entirely, including the requirements to identify certification functions, carry out F&P assessments on recruitment and annually thereafter, issue certificates and obtain the associated regulatory references. Neither regulator proposes a like-for-like replacement. However, firms will remain responsible for ensuring that individuals in relevant roles are competent and suitable and meet appropriate standards of conduct. The FCA suggests that firms can meet these obligations by relying on existing requirements, such as the competence and suitability rules, ordinary employment processes, the Conduct Rules, Training and Competence qualification requirements and the Consumer Duty. The PRA would rely on its wider prudential framework, plus a new personal-characteristics requirement for CRR and Solvency II firms.
Who would still need a regulatory reference? Both regulators would remove reference requirements for previously certified roles. The FCA confirms references would remain for approved and notified SMF appointments, and the PRA likewise retains more stringent requirements for SMFs and other key senior individuals. However, the FCA indicates that firms will remain responsible for assessing each candidate's competence and suitability for the role, and suggests that firms can use ordinary employment references and other lawful checks. This would result in the regulatory reference requirements no longer being applicable to the vast majority of individuals, which may hinder the ability to stop "rolling bad apples" as was intended with this regime.
What happens to the Directory? The FCA proposes retiring it altogether. Directory submissions, updates and annual attestations would end, and only information on firms and SMFs would remain on the FCA Register. We are aware that some individuals, particularly those in the retail space, welcomed being on the Directory so that clients could see their credentials. However, on balance, we think this proposed simplification will be welcome.
Are any alternatives on the table? Yes, but only from the FCA. Acknowledging that removal is a significant change that could introduce risks, the FCA invites views on alternatives that would retain the more beneficial elements of the current regime: keeping some or all certification requirements for a subset of functions, retaining regulatory reference requirements for particular roles, or maintaining elements of the Directory. It asks for evidence of the value of retention, cost and benefit estimates where possible, and views on any unintended consequences of removal. Importantly, the FCA does not intend to reconsult if it decides to keep or amend any of these elements, so any views as to what a future regime may look like need to be addressed now. The PRA is not consulting on alternatives, having concluded that its wider prudential framework already provides many of the regime's benefits and that a successor regime would impose disproportionate costs.
6. Conduct Rules
What happens to Conduct Rules training? The Conduct Rules themselves are not changing, but the training duty is being removed. The FCA would instead require firms to notify staff of the Conduct Rules that apply to them and the consequences of breach. Dedicated training would not be required, so firms could build this into induction or wider compliance and conduct communications. The PRA does not propose a replacement training requirement either.
What is the FCA proposing on breach reporting? The FCA would tailor what is reported, and when, to the individual's seniority:
SMFs: no change to the current requirements. A breach would be reportable if it results in disciplinary action amounting to a formal written warning, suspension, dismissal or reduction or recovery of remuneration, with the initial outcome reported within seven business days.
Other senior Conduct Rules staff (those providing temporary SMF cover and non-executive directors): breaches where there has been the same, broader set of disciplinary actions would remain reportable, but all relevant breaches would be reported within seven business days, removing the current split between immediate and annual reporting (i.e. removing the requirement to report within 7 business days where there was a breach of Senior Manager Conduct Rules, but only annually where there was a breach of the Individual Conduct Rules).
All other staff (those subject only to the Individual Conduct Rules): only breaches which result in a final written warning or dismissal would be reportable. Annual reporting would be replaced by a requirement to notify the FCA within 14 months of the disciplinary action, reporting only the final outcome after any appeal. The FCA also proposes streamlining the reporting form, including more structured questions, to make it easier to complete.
The regulatory reference template would also be updated, so firms would only be required to disclose past breaches if disciplinary action met the reporting threshold that would apply to that role (e.g. a first written warning would not be disclosed unless the individual was an SMF at the time).
FCA guidance would also confirm that firms need not decide whether misconduct breaches the Conduct Rules unless it results in a reportable disciplinary action. We think this is helpful and clarifies the position that there would not be "non-reportable" Conduct Rule breaches.
What is the PRA proposing on breach reporting (dual-regulated firms only)? The PRA's changes are narrower. It would move the statutory definition of disciplinary action into its Rulebook Glossary as "disciplinary or remuneration action", and Form L reporting within seven business days would continue. There would be no change to the reporting requirements in relation to SMFs, temporary SMF cover-holders and Conduct Rule NEDs (previously "notified NEDs"). For individuals that were previously in scope of the PRA's Certification Regime (i.e. Material Risk Takers, Key Function Holders and certain other functions), the PRA proposes amending the definition of disciplinary action such that it would replace "formal written warning" with "final written warning", but reporting in relation to suspension, dismissal and / or the reduction or recovery of remuneration would remain.
7. Other changes
How are the Enhanced thresholds changing? Building on Phase 1, which updated the thresholds for inflation and introduced periodic updating, the FCA proposes a further reset to focus Enhanced requirements on firms whose scale, complexity or risk justifies them. It would raise the consumer credit, asset manager and intermediary thresholds by around 50%. For example, the "AUM threshold", which was updated to £65bn with the Phase 1 SMCR Reforms, would be increased to £100bn. The FCA also proposes replacing the Significant SYSC test for wholesale markets firms with a simpler assets-based threshold (£750m). The mortgage and client-assets thresholds would not change. Firms falling out of Enhanced would remain subject to the Core regime, and the FCA would expand its guidance on when it may still require a Core firm to comply with Enhanced requirements. This may result in some firms no longer meeting the Enhanced firm thresholds, and being descoped to Core firm status. The same calculation methodology would apply, and we will have to wait to see whether any transitional period is introduced.
What changes for forms and supporting material? Less duplication and more flexibility. Both regulators would move forms out of their rulebooks so they can be updated more easily, and remove duplicative attachments to SMF applications such as handover summaries. The PRA would also remove Form M, renaming "notified NEDs" as "Conduct Rule NEDs", who must still be fit and proper.
Can firms request time-limited or conditional approvals? Yes, within limits. Both regulators would permit firms to apply for time-limited or conditional approvals without the statutory notice process. This could help with interim appointments, but does not lower the standard for approval / notification.
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