Fortune favours the bold? SMCR reform: Phase Two

The FCA and PRA have published Phase Two of their reform of the Senior Managers and Certification Regime (“SMCR”), in Consultation Papers CP26/37 (FCA) and CP14/26 (PRA). These are the latest in a series of proposals designed to streamline individual accountability rules and reduce burdens on firms.

The regulators first consulted stakeholders on the regime's efficacy, scope and proportionality in a 2023 discussion paper as part of the government's Edinburgh Reforms, alongside a joint Call for Evidence by HM Treasury (“HMT”) on any legislative changes needed to rebalance the rules.

In 2025, the PRA and FCA launched their Phase One consultations alongside HMT’s legislative review. Phase One made short- to medium-term changes that did not require new legislation, with final rules and feedback published in April 2026. HMT also confirmed plans to amend FSMA to enable deeper reform, now reflected in the Financial Services and Markets Bill 2026 (“FSMB26”), which is currently before Parliament.

Phase Two is more structural: it explores which Senior Manager roles need pre-approval, the continued utility of the Certification Regime, and how conduct rule breach reporting should work going forward. Unlike Phase One, these changes depend on FSMB26 being enacted and commenced. Both regulators are pressing ahead now so they can finalise the regime as soon as the FSMA amendments take effect.

The consultations close on 22 January 2027.

We are producing a detailed client note reviewing the proposals. In the meantime, below is a list of the key proposals and main points firms with which firms may wish to engage during the consultation period, including key areas of divergence between the regulators.

Key proposals: a high-level summary

Senior Managers Regime: 

• Introduce a new "notified" tier of senior manager roles, retaining pre-approval for only the most significant, in respect of which this remains a necessary regulatory control;

• Remove SMF18/SMF22 for all firms;

• Narrow the SMF7 definition and, for the PRA, split it into a notified and a pre-approved function;

• Extend temporary SMF cover from 12 to 18 weeks; 

• Allow time-limited/conditional SMF approvals;

• Raise enhanced firm thresholds, so enhanced requirements apply only where the incremental risk of the firm justifies the additional burden; and

• Relax the rules around statements of responsibilities, management responsibilities maps and prescribed responsibilities requirements.

Certification Regime:

• Both regulators propose scrapping the Certification Regime entirely, shifting responsibility for staff competence and suitability onto firms under their existing employee rules (note that individual conduct rules will still apply);

• Remove regulatory references for certified persons; and 

• Retire the Directory.

Conduct Rules: 

• Conduct rules training moves from a prescriptive "all reasonable steps" duty to an obligation to notify all staff subject to the conduct rules of the rules that apply to them and the consequences of a breach.

• Reporting thresholds raised where disciplinary action is taken against non-SMFs in respect of conduct rule breaches; 

• Reporting timelines are simplified; 

• New guidance clarifies when a conduct rule breach must be considered; and 

• Sole traders brought within scope of COCON.

Initial insights

• Phase Two, if enacted as proposed, would be a significantly larger implementation change than Phase One. Firms would need to devote considerable resource to designing new systems and controls, as both regulators look to shift a significant share of responsibility for assessing staff character and competence onto employers. When considering this package of proposals, firms may wish to weigh whether the short-term pain of adapting to these changes is justified by the longer-term gain of a lighter-touch, more streamlined regime.

• Removing most of the mechanics of the Certification Regime - in particular the obligaiton to assess and sign off on staff fitness and propriety - is unexpected. Firms that value the regime should consider identifying and advocating for its specific benefits in their consultation responses. Firms should also consider the implications for their management of non-financial misconduct given the proposed removal of mandatory fitness and propriety assessments for their non-SMF staff population.

• For dual-regulated firms, some of the divergence seen during Phase One persists. The FCA and PRA continue to take explicitly different approaches in some areas; in others, the regulators are almost aligned, but not quite. This may bring operational challenges for dual-regulated firms. In particular:

  • The divergence around SMF7s seen during Phase One (in terms of the FCA’s narrower approach) continues in Phase Two. Specifically, the PRA intends split the function into a notified SMF7a and pre-approved SMF7. This will require dual-regulated firms within group structures to undertake a fresh mapping exercise once final rules are published. All firms in group structures (whether solo- or dual-regulated) will still need to assess what constitutes ‘significant’ influence exercised by group company members over their UK entity, with both regulators introducing new guidance during Phase One to support this.

  • The FCA plans on dropping the requirement that an SMF vacancy be ‘reasonably unforeseen’ where a firm wishes to rely on its new 18-week temporary SMF cover period (which would replace the current 12-week rule). The PRA maintains that absence will still need to be temporary or reasonably unforeseeable for temporary cover to be permissible for PRA functions at dual-regulated firms. This would mean different temporary cover arrangements applying within the same dual‑regulated firm. To mitigate this, the FCA suggests retaining the "reasonably unforeseen" test for dual-regulated firms (to preserve alignment with the PRA). Feedback from dual-regulated entities on this point will be crucial. 

• Neither consultation paper addresses whether prescribed responsibilities may be shared or split in matrixed structures. They are also silent on the issue of whether prescribed responsibilities can be allocated to temporary SMFs, something for which several trade bodies have advocated. Concerns here may be somewhat aleviated by the fact that the proposals envisage fewer PRs overall applying in future.

• The regulators propose raising the reporting threshold where disciplinary action is taken against non-SMFs in respect of conduct rule breaches, with the FCA going furthest in this regard. Given this covers the largest population of employees within regulated firms, the proposal offers firms clear administrative advantages. Neither regulator has changed the underlying reporting thresholds for SMFs or for non-SMFs subject to senior manager conduct rules. This may be viewed by some as a missed opportunity to take advantage of the removal of the current prescriptive requirements in s.64C FSMA.

• The CPs necessarily address only the administrative and operational burdens imposed by FCA and PRA policy. Industry feedback during Phase One consistently identified the FCA's Connect portal, rather than simply submission frequency, as a key operational bottleneck. To make a meaningful difference to firms, policy changes need to be accompanied by a genuine overhaul of the regulators’ own infrastructure for receiving information from firms and processing approvals.

Implementation is targeted for the second half of 2027, with final rules published around six months earlier. This is contingent on the Financial Services and Markets Bill 2026 first being enacted and commenced. Firms will need to build contingency into their planning and continue to track the progress of the legislation alongside the progress of these latest consultations.