FCA and PRA Consult on Phase Two of SM&CR Reforms

On 22 October 2026, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) (together, the Regulators) published consultation papers on phase two of their reform of the Senior Managers and Certification Regime (SM&CR) (FCA CP26/37 and PRA CP14/26, together the Consultations).

Background

The Consultations build on the phase one changes confirmed in April 2026, and on the legislative changes proposed in the Financial Services and Markets Bill 2026-27 (Bill). The Bill would remove many prescriptive SM&CR requirements from the Financial Services and Markets Act 2000 and enable the Regulators to decide in their rules how those requirements should apply. For further information on the phase one changes, please see our previous article available here.

The Regulators’ aim is to streamline and improve the SM&CR by retaining the core of the regime while removing requirements where the evidence does not show that the benefits outweigh the costs. The FCA estimates that annual compliance costs across in-scope firms of £434.5m will fall by around 53%. 

Certification Regime and Directory to be scrapped

A key change is removing the Certification Regime altogether. The SM&CR currently covers around 139,000 individuals performing approximately 261,000 functions. The FCA would also retire its Directory of certified and assessed persons, and firms would no longer have to obtain regulatory references for staff who were previously certified. Instead, the Regulators would rely on existing competence and suitability requirements, such as SYSC 3.1.6R and SYSC 5.1.1R, and regulatory references would still be required for individuals applying for senior manager function (SMF) roles, whether approved or notified. 

The removal of the Certification Regime is expected to account for £133m of the estimated annual savings, which is the largest quantified annual saving in the Consultations. This reflects its large population and the recurring requirements to identify Certification Functions, assess fitness and propriety and undertake annual certification.

Senior Managers Regime: fewer approvals

At dual-regulated and enhanced firms, certain SMFs (i.e., SMF5 and SMF10-15) would move from approval to notification. Notified senior managers would still be vetted by the firm, and they would remain subject to the Duty of Responsibility and the Senior Manager Conduct Rules. The FCA-only functions SMF18 (Other Overall Responsibility Function) and SMF22 (Other Local Responsibility Function) would be removed, and SMF7 (Group Entity Senior Manager Function) would be narrowed for solo-regulated firms, which would require firms to reallocate responsibilities to other senior managers.

Other proposed changes include, among other things:

• removing nine Prescribed Responsibilities;

• no longer requiring firms to submit revised Statements of Responsibilities and Management Responsibilities Maps, although firms would still be required to maintain up-to-date internal versions of these documents; and

• extending the temporary cover rule from 12 to 18 weeks and replacing the “reasonably unforeseen” test with “reasonable use”. 

Good news for asset managers

The FCA proposes to raise the “enhanced” threshold for asset managers from £65bn to £100bn of assets under management. Thresholds for consumer credit lenders and intermediaries would also rise by around 50%. For wholesale markets firms, the “Significant SYSC” threshold would be replaced with a £750m assets threshold. Firms that drop out of the enhanced category would remain subject to the Core requirements. However, the FCA would also expand its guidance on when it may require a firm to meet enhanced requirements anyway.

Conduct Rules

The Conduct Rules themselves would not change. However, training requirements would be replaced by an obligation to notify staff of the applicable Conduct Rules and the consequences of a breach. For most non-SMF staff, breaches would only need to be reported where they lead to a final written warning or dismissal, and firms would have up to 14 months to report final outcomes. Reporting requirements for SMFs would stay the same. Sole traders would be brought within the scope of COCON. 

Concluding remarks

These reforms, if implemented as proposed, should give firms real relief from time-consuming compliance processes, particularly those asset managers that fall below the new “enhanced” threshold. Even so, firms should not see the removal of the Certification Regime as a reason to relax their controls. The FCA still expects firms to keep assessing honesty and competence at hiring and to reassess where needed. FCA supervisors and enforcement teams will continue to expect firms to show how they do this, so firms will need to continue to document their internal assessments and updates.

Both Consultations close on 22 January 2027. Final rules are expected in the first half of 2027, with implementation around six months later.

FCA CP26/37 and PRA CP14/26 are available here and here, respectively.