SM&CR reforms, phase 2: the FCA and PRA consult on the most significant reforms since the regime’s introduction

Background

On 22 October 2026, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) (together, the Regulators) published their long-awaited Phase 2 consultations on reform of the Senior Managers and Certification Regime (SM&CR): FCA CP26/37 (the FCA Consultation Paper) and PRA CP14/26 (the PRA Consultation Paper) (together, the Consultation Papers). The proposals build on the Phase 1 changes made in April 2026 (FCA PS26/6 and PRA PS12/26) and are designed to use the additional flexibility that the Financial Services and Markets Bill 2026 (the FSM Bill), introduced into Parliament in May 2026, would give the Regulators if enacted. 

This is the latest in our series of updates on the SM&CR review. Our July 2025 article provided an overview of the original FCA, PRA and HM Treasury (HMT) consultations, and our May 2026 article reported on the Phase 1 final rules and HMT’s Consultation Response. 

The Phase 1 reforms were finalised in April 2026 in the FCA’s PS26/6 and the PRA’s PS12/26, introducing changes within the Regulators’ existing powers, including the revised 12-week rule and less frequent submission of Statements of Responsibilities (SoRs). In April 2026, HMT published its consultation response, and in May 2026 the Government introduced the FSM Bill into Parliament. The FSM Bill, if granted Royal Assent, will remove many prescriptive SM&CR requirements from legislation and leave it to the Regulators to decide how those requirements should apply in their rules. 

These October 2026 Consultation Papers mark the start of Phase 2 of reform. The PRA describes its latest proposals as “the most significant reforms to the regime since its introduction”. Together, the Regulators expect the package to meet the shared ambition, agreed with the Government, of reducing the regulatory burden of the SM&CR by 50% and the number of Senior Manager pre-approvals at banks and insurers by 40%, while maintaining robust individual accountability. 

Significant elements of both packages depend on Parliament enacting the FSM Bill substantially in its current form. The Regulators are consulting now, alongside the parliamentary process, so that rule changes can be made as soon as possible after Royal Assent. 

FCA Consultation Paper

The FCA Consultation Paper applies to all firms already within the scope of the SM&CR, including third-country branches, and to firms due to come into scope, such as cryptoasset firms. Some proposals affect only dual-regulated and Enhanced firms; others affect all firms. Dual-regulated firms should read the FCA Consultation Paper alongside the PRA Consultation Paper. The FCA’s key proposals are set out below.

1. Senior Managers Regime

SMF notification – The FSM Bill would allow the Regulators to replace pre-approval with notification for certain Senior Management Function (SMF) appointments. The FCA proposes that the following roles at dual-regulated and Enhanced firms become notified rather than approved:

• 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),
• SMF14 (Senior Independent Director), and
• SMF15 (Chair of the With-Profits Committee). 

The FCA estimates that these changes will reduce SMF applications from FCA solo-regulated Enhanced firms by around 15%. The FCA considers that these oversight and assurance roles do not usually involve the same day-to-day executive control as the roles that would remain approved functions.

The FCA has not proposed making SMF24 (Chief Operations Function) a notified role, given the current operational risk profile, particularly from frontier AI systems and cyber risks. It intends to review this position two years after implementation.

Notified SMFs would be subject to the same requirements and expectations as approved SMFs, including candidate vetting and fitness and propriety (F&P) assessments. Vetting would be the responsibility of the holder of Prescribed Responsibility (PR) A, which the FCA intends to retain (see below). Notified SMFs would be distinguished from pre-approved SMFs on the Financial Services Register.

The notification process – Firms would notify the FCA after completing the F&P assessment, up to three months before the individual takes up the role. The notification would include only the candidate’s details, confirmation that the F&P assessment is complete and, where required, an SoR and Management Responsibilities Map (MRM). The FCA intends to carry out only automated checks that the form is complete and the individual is not prohibited. An immediate notification would take effect on the FCA’s acknowledgement of receipt; an advance notification would take effect on the specified start date.

Pre-approval in exceptional cases – Under the FSM Bill, the Regulators could require a firm to seek approval for a function that would otherwise be notified. The FCA expects to use this power rarely, relying on its existing powers under section 55L of the Financial Services and Markets Act 2000 (FSMA) to impose requirements, for example where it has serious concerns about a firm’s governance or where a notified role is particularly important to the firm’s safety and soundness.

Removal of SMF18 and SMF22 – The FCA proposes to remove the FCA-only functions SMF18 (Other Overall Responsibility) and SMF22 (Local Responsibility), which account for 19% of applications at solo-regulated Enhanced firms and 24% at dual-regulated branches respectively. Firms would need to reallocate the relevant PRs and overall and local responsibilities to other SMFs. To support this, the FCA proposes amendments to SYSC 26 and COCON allowing greater use of delegation, layered management structures and governance and reporting frameworks.

Narrowing SMF7 – For solo-regulated firms, the FCA proposes to narrow the Group Entity SMF (SMF7) to individuals who both exercise significant influence over the SM&CR firm’s activities and perform one of a specified list of group functions: Chief Executive, Chief Finance, Chief Risk, Chief Operations, Chair of the governing body, Compliance Oversight and Money Laundering Reporting Officer. The FCA estimates that this will reduce the solo-regulated SMF7 population by about 40%. Unlike the PRA, the FCA does not propose a notified-only SMF7 category.

Time-limited and conditional approvals – Dual-regulated firms, solo-regulated firms in dual-regulated groups and Enhanced firms could apply for time-limited or conditional SMF approvals. Statutory notices would not be needed where the firm requested the condition. The FCA expects such requests to be rare.

Enhanced firm thresholds – Building on the inflation-based uplift made in Phase 1, the FCA proposes to raise Enhanced firm thresholds for consumer credit lenders, asset managers and intermediaries by around 50%. For wholesale markets firms, the Significant SYSC test would be replaced with a simpler threshold of £750m in assets, calculated as a three-year rolling average. The mortgage and client asset thresholds would remain unchanged. The FCA also proposes to supplement its guidance on when it may require a Core or Limited Scope firm to comply with the Enhanced regime, including by reference to size, complexity, market impact and group-level thresholds. 

The 12-week rule – The period for submitting an SMF application or notification under the temporary cover rule would be extended from 12 to 18 weeks. For FCA solo-regulated firms and FCA functions in dual-regulated firms, the requirement that the absence be ‘reasonably unforeseen’ would be replaced with ‘reasonable use’ rules based on the Phase 1 guidance. As the PRA proposes to retain the ‘reasonably unforeseen’ test, dual-regulated firms could face different standards for different functions.

SoRs and MRMs – Firms would no longer need to submit revised SoRs or MRMs when responsibilities change. Firms would still need to submit an SoR with an SMF application or notification, keep SoRs and MRMs up to date internally and provide them to the Regulators on request. A six-year retention period is proposed (ten years for some dual-regulated firms, to align with the PRA). SoRs and MRMs would also no longer be required where only one individual performs SMF roles, benefiting around 18,800 firms. The FCA has also clarified that an MRM submitted with an application should show the intended governance arrangements following the appointment.

Prescribed Responsibilities – The FCA proposes to remove nine PRs and retain only PR A (Senior Managers Regime), PR D (financial crime) and PR Z (CASS) for Core and Enhanced firms, plus PR J-3 (oversight of outsourced internal audit) for Enhanced firms. Removing a PR does not remove the underlying requirement. Core firms would not need to update SoRs solely because of the PR changes, but Enhanced and dual-regulated firms would need to make the necessary changes to SoRs and MRMs at commencement. 

Forms and reporting – The FCA proposes to remove certain supporting document requirements, including the summary of the handover document and MiFID annexes, and to move the Approved Persons forms out of the Handbook and onto its website. It also proposes to revoke the MiFID authorisation and management body change notification ITS for solo-regulated firms and to remove the Notified Persons requirement (Form F).

2. Certification Regime and the Directory

Removal of the Certification Regime – The FCA proposes to remove the Certification Regime entirely, noting that it is unusual internationally and involves tracking around 139,000 individuals performing approximately 261,000 functions. The FCA would instead rely on existing requirements, including the competent employee rules (SYSC 3.1.6R and SYSC 5.1.1R), the Conduct Rules, Training and Competence requirements, the Statement of Professional Standing regime and the Consumer Duty. Related guidance on competence and suitability would be extended to insurers, managing agents and the Society of Lloyd’s. 

Regulatory references – Regulatory references would no longer be required for previously certified individuals, but would still be required for individuals applying for SMF roles (whether approved or notified). 

The Directory – The FCA proposes to retire the Directory of certified and assessed persons and the associated reporting and attestation obligations, citing the Directory’s limitations and the recently launched FCA Firm Checker. 

Alternatives – Recognising the significance of this change, the FCA invites views on alternatives to removal of the Certification Regime, such as retaining requirements for some of the eight certification functions, retaining regulatory references for particular roles or keeping elements of the Directory. Notably, the FCA does not intend to reconsult if it decides to retain or amend parts of these regimes. 

3. Conduct Rules

The Conduct Rules themselves, which cover around 900,000 individuals, are not changing, but the FCA proposes the following changes: 

Training – The statutory training duty would not be replicated. Instead, firms would need to notify everyone subject to the Conduct Rules of the rules that apply to them and the consequences of breach, which could be done through wider induction or compliance communications. 

Breach reporting – For non-SMF staff subject only to the Individual Conduct Rules, the reporting threshold would rise to a final written warning or dismissal, which the FCA estimates would reduce the burden of breach determination and reporting by around 30%. Annual REP008 reporting would be replaced by a requirement to report the final disciplinary outcome within 14 months of disciplinary action being imposed. For non-SMFs subject to the Senior Manager Conduct Rules, all breaches would be reported within seven business days and annual reporting would be removed. Reporting for SMFs, and notifications under Principle 11 and SUP 15, would remain unchanged. 

Non-reportable breaches – New guidance would confirm that firms need not decide whether misconduct amounts to a COCON breach unless it results in reportable disciplinary action. The regulatory reference template would be updated to reflect the revised reporting thresholds. 

Sole traders – Sole traders would be brought within the scope of COCON.

PRA Consultation Paper

The PRA Consultation Paper is relevant to all PRA-authorised firms subject to the affected SM&CR requirements, and potentially to firms applying for PRA authorisation. The PRA estimates that around 1,200 firms would be affected. The proposals are generally aligned with the FCA’s, but there are notable differences, highlighted below. 

1. Senior Managers Regime

Notified and pre-approved SMFs – The PRA proposes to remove the pre-approval requirement for almost half of the current SMFs, expecting SMF application volumes to fall by more than 40%. The proposed notified PRA functions are: 

• SMF5 (Head of Internal Audit),
• SMF6 (Head of Key Business Area),
• SMF7a (Notified Group Entity Senior Manager),
• SMF8 (Credit Union Senior Manager),
• SMF10, SMF11 and SMF12 (Chairs of the Risk, Audit and Remuneration Committees),
• SMF14 (Senior Independent Director),
• SMF20 (Chief Actuary), and
• SMF20a (With-Profits Actuary). 

Splitting SMF7 – The PRA proposes to split SMF7 into pre-approved and notified roles. Individuals exercising significant influence at group level would need pre-approval where their group role corresponds to certain pre-approved functions, such as Group Chief Executive, CFO, CRO, COO, Chief Compliance Officer, MLRO and Board Chair. All other SMF7s would become notified SMF7a roles. Firms must assess the substance of the group role, not the job title. 

Accountability for F&P – Firms would still need to assess all SMFs, including notified SMFs, as fit and proper before appointment. The PRA would clarify that PR A covers the firm’s vetting of SMF candidates. Notified SMFs would be held to the same standards as pre-approved SMFs, including the Duty of Responsibility and the Senior Manager Conduct Rules. 

Pre-approval in exceptional cases – The PRA could use its section 55M FSMA powers to require pre-approval for some or all notified roles at a firm, for example where the firm is at risk of failing, where there are serious concerns about its governance or ability to assess F&P, or where a notified role is particularly important to its safety and soundness. The PRA may use this power before implementation so that affected firms do not move to notification. 

Announcements ‘subject to regulatory approval’ – For roles that remain pre-approved, the PRA expects firms to obtain approval before any public announcement. Announcements ‘subject to regulatory approval’ should be made only where strictly necessary, for example because of market disclosure obligations or a time-sensitive change in control. Firms should discuss such appointments with the PRA beforehand, consistent with Fundamental Rule 7. 

PRs, SoRs and MRMs – The PRA intends to remove several PRs, including those relating to the Certification Regime, training and induction, MRMs and maintenance of the business model, but would retain more than the FCA. Firms would no longer need to submit SoRs and MRMs whenever they change significantly, and Form J would be removed, but the documents must be kept up to date and provided on request. The PRA estimates this would remove around 1,700 submissions a year. Firms with a single Senior Manager would not need to maintain SoRs or MRMs, subject to specific counting rules for temporary absences and cover arrangements. 

Temporary SMF cover – In line with the FCA, the PRA proposes to extend the temporary cover period from 12 to 18 weeks. However, the PRA expects the extension to be used only where clearly justified and will retain the ‘temporary’ or ‘reasonably unforeseeable’ absence requirements for PRA functions. The PRA and FCA therefore intend to apply different tests. 

Time-limited and conditional approvals – Firms would be able to apply directly for time-limited approvals, for example to cover short-term vacancies in pre-approved roles. Concerned that conditions could be used to approve candidates who would otherwise fail F&P standards, the PRA would permit only one type of condition to be requested: that a candidate reduces or stops certain activities. For example, a Chair (SMF9) could be required to give up non-executive directorships above the permitted maximum. The PRA expects such requests to be rare. 

2. Certification Regime

The PRA, similarly to the FCA, proposes to remove the Certification Regime, which will impact approximately 7,700 individuals. Instead, the PRA would build on the competent employee rule so that CRR and Solvency II firms must take reasonable steps to assess whether individuals in previously certified functions have the necessary integrity, honesty and other personal characteristics, on recruitment and again where there is reasonable cause. 

3. Other proposals

Conduct Rule breaches – The Individual Conduct Rules would continue to apply to Key Function Holders, Material Risk Takers and certain senior credit union roles. For roles previously within the Certification Regime, the reporting threshold would rise from a ‘formal written warning’ to a ‘final written warning’, after any appeals process is complete. Suspension, dismissal and reduction or recovery of remuneration would remain reportable, with Form L still due within seven business days. 

Forms – Forms would be removed from the Rulebook and specified in a PRA direction. SMF notifications would be materially simpler than applications. Form M would be removed, with notified non-executive directors (NEDs) renamed ‘Conduct Rule NEDs’, and Form F would also be removed. Duplicative supporting documents, such as handover summaries and separate organisational charts, would no longer be required. 

Rulebook alignment – The PRA would align terminology and standards across the sector-specific SM&CR Parts. For example, MRMs would need to be kept up to date at all times across all sectors, and a single six-year look-back period would apply for overseas information on candidates.

Commentary

While Phase 1 was largely incremental, Phase 2 is a step change. It delivers the more fundamental change that our earlier article anticipated: both Regulators would remove the Certification Regime entirely, the Directory would be retired, and pre-approval would no longer be the default for many SMFs. For solo-regulated firms, the removal of SMF18 and SMF22 and the narrowing of SMF7 may be equally significant, as many will need to alter their responsibilities frameworks even where individuals’ day-to-day roles are unchanged.

The SM&CR pendulum is therefore swinging towards simplification, but are we at risk of losing something important? Nearly 25 years after the original Approved Persons Regime, and in the wake of a financial crisis that exposed serious failures of accountability, we have a regime the Regulators credit with raising standards. The removal of certification has been signalled for some time, but complete deletion without a proportionate replacement is a different proposition. The benefits of annual F&P assessments may be difficult to measure, but that does not mean they are insignificant: they help embed standards into firms’ day-to-day culture. At a time when the Regulators are rightly increasing their focus on non-financial misconduct and conduct culture, there is a striking tension in removing one of the routines designed to reinforce those standards. Are the Regulators at risk of undervaluing what is difficult to quantify?

This deregulation does not, however, come with a shift in responsibility. The F&P judgement remains squarely with firms, and particularly the holder of PR A, and the standards for notified SMFs remain unchanged. Both Regulators also reserve the power to reimpose pre-approval in exceptional cases. Similarly, removing certification does not remove the need to ensure staff are competent and suitable; that obligation moves into firms’ ordinary employment processes under the competent employee rules and, for CRR and Solvency II firms, the new personal characteristics requirement. Firms will need to show that these processes are robust.

The Regulators’ proposals are closely aligned, but differences remain that will matter most for dual-regulated firms. These include the PRA’s notified SMF7a category, which has no FCA equivalent; different approaches to the ‘reasonably unforeseen’ test under the 12-week (or rather, 18-week) rule; the PRA’s longer list of retained PRs; and differing breach reporting thresholds for key roles. The FCA has expressly asked whether it should modify its approach to the 12-week rule to avoid inconsistency within dual-regulated firms, and firms may wish to respond on this point.

Firms should begin preparing now. Practical steps include:

• reviewing vetting and F&P procedures for roles moving to notification;
• for solo-regulated Enhanced firms and dual-regulated branches, planning how to reallocate responsibilities currently held by SMF18 and SMF22 holders, and reassessing the SMF7 population against the new two-limb test;
• for Enhanced firms, checking whether the firm would now fall outside the Enhanced regime under the revised thresholds;
• reviewing hiring and ongoing competence processes for staff in certification functions, so firms can rely on them once certification ends; and
• reviewing breach reporting, Conduct Rules communications and regulatory reference processes in light of the revised thresholds and timelines.

Next steps

Both Consultation Papers close on 22 January 2027.

The FCA expects to publish final rules in a Policy Statement in H1 2027, with implementation around six months later in H2 2027. The PRA similarly expects implementation in H2 2027, subject to the passage of the FSM Bill and HMT’s commencement powers.

Proposed transitional arrangements would allow notifications to be submitted up to one month before commencement for appointments taking effect afterwards. Applications in progress at commencement would still be determined, and existing approvals for roles that become notified would remain effective. Firms should monitor the FSM Bill closely, as the timing and final form of both packages depend on it.

Article co-authored by Emma Gazzola, a trainee solicitor in the Financial Services Regulatory Team at CMS.