SM&CR reform – a closer look at the Phase 2 proposals

As a key element of the Leeds Reforms, SM&CR simplification aims to reduce the regulatory burden to support growth across the financial sector. Phase 1 is already live, focusing on quick wins to ease regulatory pressure in the short term. Phase 2 proposes more significant amendments, which largely depend on legislative change via the Financial Services and Markets (FSM) Bill 2026.

SM&CR reform – less paperwork, same accountability

Read this article

Removal of the Certification Regime and the Directory

The Certification Regime has been complex to navigate, in terms of identifying certification functions, issuing certificates and recertifying individuals, which the regulators consider no longer justifies the cost. As such, the regulators propose to remove it entirely, instead relying on firms’ existing processes to establish competency and suitability for a given role in line with SYSC 3.1.6R and SYSC 5.1.1R. These rules are supported by guidance on assessing honesty and competence that doesn’t apply to insurers, managing agents or the Society of Lloyd’s, so the FCA plans to bridge the gap by extending that guidance to them. The PRA proposes to build slightly on the competent employee rule for CRR and Solvency II firms, clarifying that it includes personal characteristics, including integrity and honesty, for individuals in roles previously subject to the Certification Regime. Firms would need to take reasonable steps to assess this on appointment, or where there is reasonable cause to reconsider it.

For individuals who were previously certified, conduct rules would still apply, as would Statement of Professional Standing (SPS) requirements where relevant. However, they’d no longer be subject to regulatory references, as employment references or other internal checks would be sufficient. Ultimately, firms would remain responsible for ensuring individuals have the necessary skills, competencies and training to perform their role, noting their importance in promoting good customer outcomes under the Consumer Duty.  

The FCA is also proposing to remove the Directory as it reflects a significant administrative burden for firms, with limited value for users.  

Changes to Conduct Rules training and breach reporting

Under the SM&CR Phase 2 proposals, the Conduct Rules wouldn’t change, but the FCA is proposing to replace the Conduct Rules training requirement with a notification only requirement. Employees subject to the Conduct Rules would need to be notified of how the rules apply to them, and the consequences of those breaches. This reflects a more outcomes-based approach, with firms free to decide how they enact it and ensure compliance.

• For non-SMFs that are only subject to the Individual Conduct Rules – firms would only need to notify at the point of a final written warning or dismissal, and the FCA must be notified of the final outcome within 14 months of the disciplinary action being imposed. 
• Non-SMFs that are also subject to the Senior Manager Conduct Rules (such as individuals providing temporary SMF cover and non-executive directors)there would be no change to the reporting thresholds, but all breaches must be reported within seven business days (removing the annual reporting requirement that existed for some breaches). 
• SMFs subject to all conduct rules – these rules would continue unchanged. 
• The PRA is retaining its individual conduct rules for key function holders, material risk takers and some senior roles at credit unions. For these individuals, the reporting threshold would be raised from a formal written warning to a final written warning, following the completion of any appeal. Suspension, dismissal and any reduction or recovery of remuneration would remain reportable. Reporting deadlines would remain at seven business days via Form L. 

SMF notifications to replace most pre-approvals 

The FCA and PRA are proposing significant changes to SMF appointments and definitions. For dual-regulated and enhanced firms, a number of SMF appointments would move from the current pre-approval process to a notification-only regime. Under the FCA's proposals, this would apply to SMF 5 and SMFs 10-15. SMF 13 and SMF 15 are FCA-only functions at dual-regulated firms and would therefore be notified to the FCA only. The remaining functions are PRA-designated roles at dual-regulated firms, where the PRA is proposing a similar approach. 

The FCA also plans to remove SMF 18 (Other Overall Responsibility Function) and SMF 22 (Other Local Responsibility Function), with their responsibilities allocated across existing senior manager roles. The regulators consider that these functions have been used more extensively than originally intended, bringing a wider range of roles into scope of the regime. The Chief Operations Function (SMF 24) would remain subject to pre-approval, although both regulators intend to review this position two years after implementation. 

Alongside these changes, the PRA proposes that SMF 5, SMF 6, SMF 7a, SMF 8, SMF 10, SMF 11, SMF 12, SMF 14, SMF 20 and SMF 20a would become notification-only roles, while the remaining SMFs would continue to require regulatory approval before appointment. 

SMF 7 

The SMF 7 function covers the Group Entity Senior Manager Function and is intended for individuals who exercise significant influence over an SM&CR firm. However, it’s difficult to judge whether a non-executive director or group executive meets that definition, resulting in a potentially higher volume of SMF 7 appointments than necessary. Despite the new rules/guidance published earlier in 2026), the FCA now plans to further narrow the SMF 7 definition at solo-regulated firms to target individuals who both exercise significant influence and perform a specified group function. Those roles are chief executive, chief finance, chief risk, chief operations, chair of governing body, compliance oversight or money laundering reporting officer. The PRA would retain the current scope but split the function into a pre-approved SMF 7 for core group roles, and a notified SMF 7a for those meeting just the significant influence criteria. 

The notification process 

The proposed move from pre-approval to notification would reduce the administrative burden under SM&CR, but the regulators don’t expect a change in SMF standards. Individuals would remain subject to the same vetting processes, and the Duty of Responsibility and Senior Manager Conduct Rules apply unchanged. Notified SMFs would also appear on the FS Register, which would differentiate between those requiring pre-approval and those that don’t. 

The notification process itself hasn’t been finalised and would be developed as part of the implementation of the new rules. Under the proposals, firms could notify the regulator of an appointment up to three months in advance, with the appointment taking effect on a specified future date. For immediate appointments, it would take effect on the date of regulatory acknowledgment. The regulators could still require a firm to seek pre-approval for otherwise notified SMF roles, but expect to do so only in exceptional cases, such as where they have serious concerns over a firm’s governance, its ability to carry out fitness and propriety checks, or if the role is crucial to the firm’s safety and soundness. 

Detailing SMF responsibilities 

The regulators propose a number of adjustments to how SMF responsibilities are recorded and updated. Statements of responsibility (SoRs) remain a key element in that process, and firms will still need to submit one when applying for SMF permission, or making a notification. They also need to be kept up to date, but firms won’t need to submit updated versions to the regulator unless requested. The proposed retention period is six years for most firms, and ten years for some dual-regulated firms. Firms where only one individual performs SMF roles, even if they hold more than one, would not need to maintain a SoR or management responsibility map as it would be of limited value where responsibilities sit with the same person. 

The FCA also plans to remove nine prescribed responsibilities, cutting the list to: responsibility for the Senior Managers Regime (PR A), responsibility for financial crime (PR D), responsibility for CASS (PR Z), and responsibility for oversight of outsourced internal audit (PR J-3, applicable to enhanced firms only). The PRA clarifies that PR A also covers candidate vetting when appointing a new SMF, and it plans to add additional guidance in the supervisory statements to address fit and proper assessments. 

The 12-week rule 

Phase 1 of the SM&CR reforms made changes to the 12-week rules (which the PRA now refers to as the ‘temporary SMF cover rule’), giving firms 12 weeks to submit an application, rather than gain approval for temporary absences or those that were ‘reasonably unforeseen’. However, it can be challenging to define ‘reasonably unforeseen’, and respondents said 12 weeks may not be long enough in some situations. To address this, the regulators plan to extend the window to 18 weeks. The FCA also proposes to remove the ‘reasonably unforeseen’ requirement for FCA functions, replacing it with rules on ‘reasonable use’.

However, the PRA plans to retain the ‘reasonably unforeseen’ standard for PRA functions at dual-regulated firms, which would mean different temporary cover tests applying within the same dual-regulated firm, adding complexity. The FCA is therefore also seeking views on an alternative approach, to remove the ‘reasonably unforeseen’ requirement for SMFs in solo-regulated firms, but retain it for dual-regulated firms.

Under the new proposals, firms would also be able to apply for a conditional or time-limited SMF approval. These are currently available, but added by the regulator post-application. Moving forward, firms would be able to include this in their application to reduce the need for unnecessary administrative work, although the regulators wouldn’t expect them to be used often.  

Additional changes 

The FCA also plans to reduce the scope of the enhanced regime by further raising the thresholds for consumer credit lenders (to £200m revenue), asset managers (to £100bn AUM), and intermediaries (to £75m revenue). For wholesale markets, it would replace the Significant SYSC test with a £750m assets threshold, calculated as a three-year rolling average.

On the other hand, the FCA plans to bring sole traders into scope of COCON, adding the Senior Manager and Individual Conduct Rules to the Principles for Businesses that already apply to them. 

Non-financial misconduct – embedding the new rules

Read this article

What could the SM&CR Phase 2 proposals mean for firms?

While the proposals are intended to create a more proportionate SM&CR framework across financial services, the practical impact is likely to differ between sectors. 

Banking 

Banks would see some of the most significant changes affecting UK branches and subsidiaries of overseas groups. The PRA expects many of their SMF 7s to become notified, the FCA is removing SMF22 (around a quarter of applications at dual-regulated branches), and the PRA is dropping Form F notifications for group-level changes. Even where individuals’ roles don’t change, firms will need to rethink how responsibilities are allocated and documented locally. Banks could see a reduction in the number of Senior Management Function approvals required, alongside the proposed removal of certification requirements for many non-Senior Manager Material Risk Takers. Key leadership roles would remain subject to regulatory approval, with accountability expectations continuing to sit at the heart of governance arrangements.

Insurance

The Chief Actuary and With-Profits Actuary would move to notification, while the Chief Underwriting Officer and the Lloyd's underwriting risk oversight role would remain pre-approved. Alongside those changes, insurers face an issue that does not affect banks. The FCA's guidance on assessing honesty and competence has never applied to insurers, managing agents or Lloyd’s, so it is being extended to them. Insurers that update their management responsibilities map quarterly will also need to keep it current at all times. Fewer approved roles and the proposed removal of certification requirements for certain individuals may reduce some administrative burden. Firms will also need to ensure processes for assessing fitness and propriety remain robust. 

Capital markets 

For wholesale firms, one of the more significant changes is the proposed removal of certification requirements for proprietary and algorithmic traders. These individuals would remain subject to the Conduct Rules, but without regulatory references or an annual fitness and propriety assessment, the information firms use to vet experienced hires would depend more on their own checks. Firms may want to review how they assess conduct history when recruiting from other trading firms. Proposed changes to Enhanced SM&CR thresholds could reduce the number of firms subject to the most extensive requirements.  

Asset management  

Asset managers close to the current Enhanced threshold will be watching proposals to increase the AUM threshold from £65bn to £100bn. However, the client assets threshold and the responsibility for CASS are unchanged, so firms holding client assets may stay Enhanced whatever their AUM. Firms that move to Core would no longer need Enhanced-only SMFs, handover summaries or a management responsibilities map. The narrower SMF 7 application may be particularly relevant for influential group roles such as Chief Investment Officer, which do not appear on the FCA's proposed list of functions. Roles such as Chief Investment Officer could fall outside the Senior Managers Regime altogether, so firms should consider whether accountability for significant influence still sits in the right place. Some firms could move from the Enhanced regime to Core if threshold changes are introduced, removing a number of governance and reporting requirements. Larger firms are unlikely to see the same structural changes, although they may benefit from streamlined approval and reporting processes. 

Next steps

The FCA and PRA consultations build on the changes introduced through Phase 1 of the SM&CR reforms and set out a package of proposals intended to reduce regulatory burden while maintaining accountability standards. If implemented broadly as proposed, the reforms could significantly reduce the number of roles requiring regulatory approval and simplify several aspects of the regime, including certification, reporting and record-keeping requirements.

The consultations are open until 22 January 2027, but the final shape and timing of the reforms will depend on both the consultation process and progress of the FSM Bill. Subject to those outcomes, the FCA expects to publish its final rules in H1 2027, with implementation to follow six months later. The PRA expects a comparable timeline, with implementation in H2 2027.

Firms do not need to act on the Phase 2 proposals now, and current requirements continue to apply, including the Phase 1 changes already in force. But there are some steps that firms may wish to consider while the proposals are still being developed:  

• Consider responding to the consultations, which close on 22 January 2027.
• Map current SMF holders against the proposed notified and pre-approved roles, noting the different treatment of dual-regulated firms.
• Assess how the proposals, if implemented as drafted, could affect holders of SMF 18, SMF 22 and SMF 7 roles.
• Continue maintaining SoRs and MRMs in line with current requirements.
• Review breach reporting processes to identify areas that could be affected if the proposals are adopted.
• Monitor the progress of the Bill and the final rules before making changes to operational processes.

For further information on the SM&CR Phase 2 proposals, contact Kantilal Pithia or Jon Sperrin.