Executive Summary
- What’s new: The FCA and PRA published consultation papers relating to Phase 2 of the Senior Managers & Certification Regime (SMCR) review (the Consultation Papers), proposing notification-only status for several SMF roles, removal of the Certification Regime and a higher Conduct Rule breach reporting threshold.
- Why it matters: The Consultation Papers represent a material change to the SMCR and a significant paring back of existing rules; in particular, the need to directly engage with regulators will materially drop.
- What to do next: Regulators are expecting the new rules to come into force in H2 2027, with final rules in H1 2027. Regulated firms are likely to welcome the pared-down rules but should consider carefully the implications for regulated personnel and implementation of the required internal policy changes. Interested firms can respond by January 2027.
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The UK Financial Conduct Authority (FCA) recently published Consultation Paper (CP26/37) and the Prudential Regulation Authority (PRA) recently published PRA Consultation Paper (CP14/26). The Consultation Papers are relevant to all firms already in scope of the SMCR, including third-country branches, as well as firms that are due to come into scope, such as cryptoasset firms. Dual-regulated firms must review both Consultation Papers to fully understand all relevant proposals. A summary of the key changes is included in the table below.
The deadline for feedback is 22 January 2027. The FCA intends to publish final rules in H1 2027, and both regulators intend implementation to follow in H2 2027. However, their ultimate status depends on Royal Assent of the Financial Services and Markets Bill 2026 (the FSM Bill), which is, at the date of writing, awaiting its second reading in the House of Commons.
| FCA | PRA | |
|---|---|---|
| Senior Manager Functions (SMF) Roles: Notification-Only | SMF 5, 10-15 | SMF 5, 6, 7a, 8, 10-12, 14, 20, 20a |
| Changes to the Scope of SMF7 | Sets out a higher-bar, two-limb test for solo-regulated firms defining the scope of SMF7 | Pre-approved SMF7 test remains broadly the same as the FCA’s. However, distinguishes the role for SMF7a — person exercising significant influence over the firm’s SMCR activities, which will be notification-only |
| Temporary Cover / ‘12-Week’ Rule | Extended to 18 weeks; moves to a “reasonable use” test | Also extended to 18 weeks but retains “reasonably unforeseen” test |
| Time-Limited and Conditional Approvals | Permits dual-regulated, solo-regulated firms in dual-regulated groups, and Enhanced firms to apply for such approvals | Specifies instance where appropriate for firm to request a Conditional Approval —giving up other activities |
| Prescribed Responsibilities | Retain just A, D, Z and for Enhanced, J-3 | Removes PRs relating to the Certification Regime (B) and PR allocation (E); training and induction of a firm’s governing body, senior management and key function holders (F and G); MRMs (C) and maintenance of the firm’s business model (T) |
| Certification Regime Replacements | Relies on existing requirements; extends existing SYSC guidance to insurers | Relies on existing requirements; builds on “competent employee” definition to include personal characteristics |
| Conduct Rules: Breach Reporting (Non-SMF) | Threshold increased to final written warning or dismissal for non-SMF not subject to Senior Manager Conduct Rules | Final written warning, suspension, dismissal and remuneration adjustments reportable for previously certified staff |
| Conduct Rules: Content | Training duty replaced with a duty to notify staff of their obligations and consequences of breach | N/A |
Background
In December 2022, the UK government announced a review of the existing SMCR regime. Phase 1 was finalized in April 2026 — see our 8 August 2025 client alert. Phase 2 involves more sweeping changes and builds on legislative changes in the FSM Bill, which would remove many prescriptive SMCR requirements from the Financial Services and Markets Act (FSMA) and leave it to the regulators to determine how those requirements should apply through their own rules. The regulators are consulting alongside the FSM Bill’s progress through Parliament so they can be implemented once the FSM Bill obtains Royal Assent.
The goal of the reforms is to make the UK financial sector more efficient without sacrificing individual accountability, consumer protection or market integrity. The FCA acknowledges that “achieving better outcomes may sometimes mean accepting a degree of additional risk” and the PRA notes that moving to a regime that relies more on notifications would involve “a shift in regulatory risk appetite.”
FCA Consultation Paper
All three pillars of the SMCR regime — senior managers, certification and conduct rules — are being reformed, with the biggest changes arising in the Senior Managers Regime (SMR) and the Certification Regime.
Senior Managers Regime
Notification Process Replacing Pre-Approval
At dual-regulated and Enhanced firms, certain Senior Management Functions (SMFs) will no longer require FCA approval; they will instead move to a notification regime. Appointment will therefore not be subject to the 60-day approval window, but a firm must still ensure that the candidate does not perform the functions in question until the firm has notified the FCA and the notification has become effective. Notified SMFs will remain subject to the Duty of Responsibility and Conduct Rules and will appear on the Financial Services Register.
| Which SMF Roles? |
The FCA has selected SMF 5 and SMF 10-151 on the basis that these are roles which present a relatively low risk to its regulatory objectives. While important, the FCA considers that they do not involve the “same level of day-to-day executive control” as other SMF functions. The FCA estimates that this will reduce SMF applications from FCA solo-regulated Enhanced firms by 15%. SMF 24 (Chief Operations Function) will still require pre-approval given increased operational risks in financial services from frontier AI and cybersecurity. This will be revisited in two years. |
| Notification Process |
Firms will internally assess whether the candidate is fit and proper. The FCA plans to only carry out “automated checks” that the form is complete and the individual is not prohibited. Exact details of the form are pending, but the FCA intends to require less information and fewer supporting documents. Notification will take effect on the later of: the date the FCA confirms receipt in writing or the appointment date specified in the notification (up to three months in advance of appointment). |
| Exceptional Cases | The FCA plans to use its “own initiative” powers in s55L FSMA to require pre-approval for notified functions in exceptional cases. Potential use cases include where the FCA has “serious concerns” about a firm’s “governance,” “ability or willingness to assess the fitness and propriety” of the notified SMF, or where the role is of “particular importance to the firm’s safety and soundness.” |
Reducing SMF Roles
| Remove SMF18 (Other Overall Responsibility) and 22 (Local Responsibility) |
The FCA proposes to remove these functions because they make up a significant portion of SMF applications, including in roles that were not intended to be SMFs. It will also amend SYSC 26 and COCON. The draft guidance will clarify that:
Alternatively, the FCA asks whether SMF18 and 22 should instead become notified SMFs. If so, it would not make the SYSC 26 and COCON changes. |
| Narrowing the Scope of SMF7 at Solo-Regulated Firms |
The FCA proposes to reduce the scope of the SMF7 function (Group Entity Senior Manager). SMF7 will only cover individuals who “exercise significant influence over the SMCR firm’s activities” and perform specified group or subgroup functions.2 It estimates that this will reduce the solo-regulated SMF7 population by about 40%. Importantly, the PRA proposes to make individuals who “exercise significant influence” but do not perform one of the specified group functions notified SMFs (a new SMF7a designation). We discuss this in detail below. The FCA does not take this position — at a solo-regulated firm, the new SMF7 definition would require meeting both limbs. |
Other SMF Reforms
| Removing 9 Prescribed Responsibilities (PRs) and Retaining Certain PRs |
|
| Temporary SMF Cover (Also Known as the ‘12-Week Rule’) | The FCA proposes extending its approach to 18 weeks. It also proposes permitting it to be used on a “reasonable use” basis. This differs from the PRA’s approach, which retains the “reasonably unforeseen” test (discussed below). |
| Time-Limited and/or Conditional Approvals | The FCA proposes to permit dual-regulated firms, solo-regulated firms in dual-regulated groups, and Enhanced firms to apply for time-limited or conditional approvals. |
| Reforming Significant SYSC Firm Threshold and Other Thresholds |
The FCA proposes changing these thresholds so fewer firms are classified as Enhanced. The proposals differ for different types of firms:
|
| Statements of Responsibilities (SoRs) |
The FCA proposes to remove the requirement to submit revised SoRs. Firms will still be required to maintain up-to-date internal SoRs that must be made available to the regulator on request. The FCA proposes a six-year retention period for SoRs for most firms, but proposes to match the PRA’s proposed 10-year retention period for most dual-regulated firms. However, the FCA proposes to remove this requirement entirely where one individual performs all SMF roles in a firm. |
| Management Responsibilities Maps (MRMs) |
The FCA proposes to remove the requirement to submit revised MRMs. Like SoRs, firms will still be required to maintain up-to-date internal MRMs that must be made available to the regulator on demand. These must also be retained for six years (or 10 years for dual-regulated firms). Consistent with its SoR proposal, the FCA proposes to remove this requirement entirely for firms where one individual performs all SMF roles. |
| Notification and Reporting Processes |
The FCA proposes to remove and streamline certain notification and reporting processes, namely to remove:
|
Certification Regime
The second aspect of the proposed reforms is the repeal of the Certification Regime. The FCA noted that the regime is “unusual internationally” and that respondents considered the regime too wide, complex and duplicative, with limited benefit (i.e., there is no clear evidence that it improves individual accountability or consumer protection).
Remove Entirely and Rely on Existing Requirements
The FCA and PRA are proposing to remove the Certification Regime in its entirety and propose to rely on existing requirements — namely the competent employee rules,3 the Conduct Rules, standard qualification requirements, Statements of Professional Standing, and the Consumer Duty — to achieve a more proportionate outcome.4 Both the PRA and FCA are proposing to make some technical changes to existing requirements imposed on firms when assessing individuals to make sure they are aligned and, where relevant, CRR and Solvency II requirements are accurately reflected.
Remove Regulatory References and the Directory
The FCA and PRA are also proposing to remove the requirement for firms to obtain regulatory references for individuals in previously certified roles. Firms told the FCA that these references rarely added value beyond their own checks and caused delays in recruitment.
However, regulatory references would still be required for all SMF candidates (whether approved or notified) and non-SMF board directors.
In parallel, the FCA proposes to retire the Directory, its public record of certified and other non-SMF individuals. Information about SMF holders would remain available on the Financial Services Register.
The FCA seeks feedback on “unintended consequences” from proposals. This proposal to remove regulatory references for previously certified staff must be read alongside the FCA’s proposed changes to Conduct Rule breach reporting (discussed below). Currently, firms must notify the FCA of any disciplinary action taken for a Conduct Rule breach, which includes a formal written warning, suspension, dismissal, or reduction or recovery of remuneration. The FCA proposes to raise this threshold for most non-SMF staff,5 including those in previously certified roles, so that only a final written warning or dismissal would be reportable. The regulatory reference template (for SMF roles) would change to match this. A former employer would only disclose a past breach if the disciplinary action met the reporting threshold for the role the individual held at the time.
The combined effect is that regulatory references would usually only be required when a firm hires into an SMF role or board director appointment, but that reference would not reveal a formal written warning, suspension or remuneration adjustment imposed while the candidate held a non-SMF role. Previously, the Certification Regime may have covered this. Moreover, given that the notification regime makes firms rather than the regulator responsible for vetting many SMF candidates, firms should consider whether they are comfortable relying on a narrower picture of individuals’ past conduct in the absence of the Certification Regime and regulatory references.
Conduct Rules
Finally, in relation to the Conduct Rules, the FCA proposes:
- Replacing the training requirement with a duty to notify staff of the rules that apply to them.
- Raising the breach reporting threshold for most non-SMF staff to final written warning or dismissal (discussed above), with up to 14 months to report. The rules for non-SMFs also subject to Senior Manager Conduct Rules will remain largely the same with some process streamlining. The rules for SMFs and process will remain the same.
- Streamlining the reporting form and clarifying when action is reportable.
- Bringing sole traders, currently subject to Principles for Businesses, within scope of COCON.
PRA Consultation Paper
The PRA’s proposals in CP14/26 apply to around 1,200 PRA-authorised firms, comprising approximately 675 deposit-takers and 560 insurers. They follow the same broad architecture as the FCA’s proposals; we focus below on the key differences.
Senior Managers Regime
Notification Process Replacing Pre-Approval
| Which SMF Roles? | The PRA is also moving some SMF functions away from pre-approval to notification-only. In addition to SMF5, 10-12 and 14, it proposes to include SMF6, SMF7a (see below), SMF8, SMF 20 and SMF20a.6 |
| Exceptional Cases | The PRA also proposes guidance on how to use its exceptional pre-approval power (under s55M FSMA) for roles that would otherwise be notification-only. Firms that consider themselves on the PRA’s radar should be alert to this. |
Reducing SMF Roles
| Group Entity Senior Manager (SMF7) |
As explained above, the PRA proposes to split the SMF7 function into appointments that would be made via notification and those that would remain subject to regulatory pre-approval. The PRA notes that SMF7s in “branches or subsidiaries of overseas banks may be likely to meet the criteria” for SMF7a. Groups containing both dual-regulated and solo-regulated firms may therefore find that the same group executive is a notified SMF7a at the group’s bank or insurer but not an SMF at all at a solo-regulated firm in the same group, and may wish to comment on the case for aligning the two approaches. |
Other SMCR Reforms
| ‘Subject to Regulatory Approval’ Announcements |
The PRA expressly recognises the difficulty firms face when its obligations under section 59 FSMA — which currently prevents individuals performing an SMF role without PRA approval — clash with its other obligations, such as market disclosure requirement related to an urgent change in Chair or CEO. The PRA proposes to formalise its existing expectation that firms obtain approval before announcing appointments to pre-approved roles. It expects that firms should only make such announcements “where strictly necessary” and still make “every effort” to discuss these appointments with the PRA. As the PRA itself notes, if regulatory approval is not granted, this could have adverse consequences for the firm and the individual in question. |
| Streamlining Prescribed Responsibilities | Like the FCA, the PRA proposes changing the rules on firms’ allocation of responsibilities to Senior Managers and related documentation requirements. However, the PRA’s remaining list of PRs is more extensive than the FCA’s. It proposes to remove PRs on certification and PR allocation, training and induction, the management responsibilities map and the business model. This means that some PRs currently shared at dual-regulated firms would become PRA-only. |
| Temporary SMF Cover (Also Known as the ‘12-Week Rule’) | Like the FCA, the PRA proposes extending this cover to 18 weeks. Unlike the FCA, the PRA proposes retaining the “reasonably unforeseen” test. The PRA sees this test as important to “uphold PRA expectations on appropriate succession planning,” which in turn supports “strong and effective governance.” The PRA also emphasizes that firms would still be expected to submit any required application or notification as soon as possible. |
| Time-Limited and Conditional Approvals for Pre-Approved SMF |
Much of the PRA and FCA’s comments on this reform are in the same vein. However, the PRA expressed concern about the potential risk of conditional approvals being used to facilitate the approval of individuals who otherwise fail to meet minimum standards of F&P. It identifies only one circumstance where it would be appropriate for a firm to request a conditional approval: where a candidate reduces or ceases certain activities relating to their employment or directorship at a firm or in an individual capacity. The PRA notes that firms could use this to propose a condition that Chairs (SMF9) resign from other nonexecutive directorships which exceed the maximum allowed under PRA rules. Firms that anticipate needing to use Conditional Approval may wish to give their views on other acceptable circumstances where the conditional approval should be granted under the PRA rules (and not just guidance). |
| Reducing the Frequency of Revised SoR and MRM Submissions | These reforms are broadly the same as the FCA’s. However, PRA-regulated firms should note that the PRA proposes to change the requirement that insurers’ MRMs need to be kept up to date at all times rather than at least quarterly, even though they will no longer routinely be submitted. An up-to-date version of SoRs and MRMs must be available to the regulators upon request. |
| Removing and Streamlining Certain Notification and Reporting Processes | Along with its proposal regarding Temporary SMF Cover, the PRA proposes to remove the requirement to submit a Form D notification. Other process streamlining-related proposals are explored below. |
Certification Regime
Removal of the Certification Regime
As mentioned above, the PRA’s proposal is aligned with the FCA’s.
Other Reforms
- Like the FCA, the PRA proposes to raise the reporting threshold for conduct breaches from formal written warning to final written warning. However, under its proposals, firms will still be required to notify in the case of breaches resulting in suspension or dismissal and/or the reduction or recovery of remuneration.
- The PRA plans to streamline forms for applications and notifications and reduce the material that needs to be submitted alongside an SMF application for pre-approval. These include changes to Forms M (notified Non-Executive Director/Key Function Holder) and F (changes to key individuals at a group).
- Finally, the PRA plans to amend inconsistencies across supervisory statements and publications and remove obsolete rules.
Implementation Period for Both FCA and PRA
Phase 2 proposals are “substantially greater in scale” than Phase 1 and both regulators acknowledge that implementation will require more time across the industry. Enhanced and dual-regulated firms will need to:
- Assess their internal processes for assessing fitness and propriety to support notification-based SMF roles, as well as roles previously subject to the Certification Regime.
- Reassess their SMF7 population.
- Make notification submission for notified roles up to one month before commencement (optional).
- Reallocate responsibilities currently held by SMF18s and 22s (noting that many PRs may be removed).
- Update SORs and MRMs (albeit they do not have to be resubmitted routinely).
- Revise their Conduct Rule breach reporting processes.
Solo-regulated firms will need to confirm whether they remain Enhanced under the new rules.
Meanwhile, Core firms will have to:
- Assess their internal processes for personnel who will no longer be subject to the Certification Regime.
- Update SoRs (noting that some solo-regulated firms with only one SMF will be allowed to drop this requirement).
- Revise their Conduct Rule breach reporting processes.
- Revise (and potentially simplify) staff training processes.
Both regulators also invite comment on transitional arrangements for roles moving to notification.
- If an individual is approved to perform a function that becomes a notified function, approvals will continue to have effect and firms will not be required to submit a notification. For PRA-regulated firms, in relation to the split of the SMF7 function, this means that approvals granted before Phase 2 implementation would continue to cover the SMF7 approved function and the SMF7a notified function following implementation. Firms would not have to notify the PRA again.
- Applications submitted before commencement of the Phase 2 changes but not determined by then would continue to be assessed under the existing framework.
Next Steps for Businesses
- Overall, we consider the Phase 2 reforms are a welcome step towards a more proportionate regime. Firms will already be assessing individuals internally and should be able to move more quickly with this process without the additional layer of regulatory supervision.
- Existing compliance processes can therefore be updated to reflect the new processes.
- Interested businesses should consider responding to the consultation by 22 January 2027 and engaging with the PRA and FCA ahead of the regime’s anticipated launch in H2 2027.
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1 SMF5 Head of Internal Audit; SMF10 Chair of the Risk Committee; SMF11 Chair of the Audit Committee; SMF12 Chair of the Remuneration Committee; SMF13 Chair of the Nomination Committee (FCA only at dual-regulated firms); SMF14 Senior Independent Director; SMF15 Chair of the With-Profits Committee (FCA only at dual-regulated firms).
2 Namely: CEO, Chief Finance, Chief Risk, Chief Operations, Chair of the Governing Body, Compliance Oversight, Money Laundering Reporting Officer.
3 This includes the competent employee rules in SYSC 3.1.6R and SYSC 5.1.1R, which already require firms to employ personnel with the skills, knowledge and expertise necessary to carry out the responsibilities allocated to them.
4 This requires firms to make sure employees are adequately trained and have the necessary skills, knowledge and expertise to support the delivery of good outcomes for retail customers under the Consumer Duty.
5 Specifically, non-SMFs only subject to Individual Conduct Rules. This “includes almost everyone working in financial services” except SMFs and others subject to the Senior Manager Conduct Rules (CP26/37, para 5.16).
6 SMF6: Head of Key Business Area; SMF8: Credit Union Manager; SMF 20: Chief Actuary; SMF20a: With-Profits Actuary.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.