UK regulators propose further reforms to senior managers accountability rules

The Senior Managers and Certification Regime (SM&CR), the updated individual accountability system introduced from 2016 in the wake of the 2008 financial crisis, is set for a significant overhaul. 

The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) published their consultation papers FCA CP26/37 and PRA CP14/26 in October setting out the proposed second phase of reforms that are expected to save firms around £2 billion over a decade.

This follows the lighter-touch phase 1 SM&CR changes in April, which aimed to address practical challenges within the constraints of existing legislation.

Phase 2 proposals

The phase 2 proposals are underpinned by the Financial Services and Markets Bill, currently making its way through Parliament. The bill will remove many prescriptive SM&CR requirements from legislation, giving the regulators more freedom to apply the regime in their rulebooks and building on the phase 1 changes. 

The phase 2 proposals range from retiring entire elements of the regime to streamlining how firms report and train staff. Some will be straightforward to implement, while others will require more careful planning. Overall, the proposals should result in an easing of compliance burdens for most firms, though this does not mean that the underlying governance and accountability standards are being reduced. 

Certification regime retired

The regulators propose removing the certification regime entirely, a change that is expected to reduce the administrative burden on firms significantly. Regulatory references for certified persons will no longer be required, although they will still be needed for senior management function (SMF) applicants. 

The FCA considers that existing requirements on employee competence and the conduct rules are sufficient to ensure individuals are competent, suitable and meet appropriate conduct standards. The conduct rules would continue to apply to individuals in certification roles,

In light of this change, the SM&CR would be renamed the "Senior Managers and Conduct Rules Regime".

Simplified SMF applications

The FCA proposals would simplify the SMF landscape, removing certain some senior management roles, narrowing the scope of others and converting several to notifiable positions. 

The regulator would remove SMF18 (other overall responsibility) and SMF22 (local responsibility), both of which have been used more extensively than originally intended. Their responsibilities would be reallocated to other SMFs. 

The scope of SMF7 (group entity senior manager) would narrow at solo-regulated firms to cover individuals performing specified group or sub-group functions. This is expected to reduce the number of holders by about 40%.

Several non-executive and committee chair roles at dual-regulated and enhanced firms will become notifiable rather than requiring pre-approval, including SMF10 (chair of the risk committee), SMF11 (chair of the audit committee) and SMF12 (chair of the remuneration committee).

Beyond these structural changes, firms will also benefit from a more streamlined application process, with those in dual-regulated groups and enhanced firms able to apply for conditional or time-limited SMF approval.

Higher enhanced thresholds 

After raising the thresholds in phase 1, the FCA proposes another round of increases that would take a number of firms out of the enhanced regime. 

For consumer credit lenders, the revenue threshold would increase from £130 million to £200 million; while, for asset managers, the assets under management threshold would increase from £65 billion to £100 billion.

For intermediaries, the revenue threshold would rise from £45 million to £75 million. For wholesale markets, a £750 million assets threshold would replace the current "significant" classification under the FCA’s Senior Management Arrangements, Systems and Controls sourcebook. 

Fewer prescribed responsibilities

The FCA proposes significantly streamlining the list of prescribed responsibilities, removing nine of the existing requirements and retaining just four. 

Prescribed responsibility J-3 (for oversight of outsourced internal audit) would continue to apply for enhanced firms, while three core responsibilities would remain for both core and enhanced firms: responsibility for the Senior Managers Regime (A), financial crime (D), and client money and assets (CASS) (Z). 

Responsibility statements

Firms will no longer need to report changes of responsibility (Form J) to the FCA or PRA, though a statement of responsibility (SoR) will need to accompany SMF applications and notifications. Firms will still need to keep SoRs updated internally and retain superseded SoRs for six years (10 years for dual-regulated firms), providing them to the regulators on request. To reduce the burden on smaller firms, SoRs will no longer be required where one individual performs all senior management roles. 

Governance maps 

Similarly, the management responsibilities map (MRM) requirements would be removed for enhanced solo-regulated firms and dual-regulated firms where only one individual performs senior management roles. The regulators also propose removing the requirement to submit routine MRM updates, though firms must keep these updated and provide them on request. 

A source of confusion among firms has been whether an MRM should show their current governance arrangements or those proposed following an appointment. The regulators propose to settle the question and clarify that an MRM should show the firm's intended governance arrangements, which will give firms a clearer picture of what is expected of them. 

Conduct rules training 

The approach to conduct rules training will be more accessible. Rather than the statutory conduct rules training duty, FCA-regulated firms would need to ensure that all staff subject to the conduct rules are made aware of the rules that apply to them and the consequences of breaching them. This gives firms flexibility in determining how they meet the requirement. Many firms will look to automate this through broader compliance or conduct communications and processes. 

Breach reporting 

The FCA intends to make breach reporting more proportionate. For non-SMF staff who are solely subject to the individual conduct rules, the reporting threshold will be raised so that only breaches resulting in a final written warning or dismissal for misconduct need to be reported. The current annual reporting requirement will also be replaced by a requirement to notify the FCA of a conduct rule breach within 14 months of imposing disciplinary action, reducing the reporting burden on firms. 

Temporary management cover 

Phase 1 amended the "12-week rule" for temporary cover when managers are absent unexpectedly. Firms now have 12 weeks to submit an SMF application, rather than 12 weeks to obtain approval. The rule applies where the absence is temporary or reasonably unforeseen. Phase 1 respondents noted that the "reasonably unforeseen" test could be difficult to determine. 

Phase 2 aims to resolve this by extending the time limit to 18 weeks and replacing the "reasonably unforeseen" test with rules on "reasonable use", providing firms with greater clarity when arranging temporary cover. However, the PRA intends to retain the existing "reasonably unforeseen" requirement. To avoid the complexity of the "reasonable use" standard applying to FCA-designated functions while the "reasonably unforeseen" test continues to apply to PRA-designated functions at dual-regulated firms, the FCA has outlined an alternative under which the new standard would apply only to FCA solo-regulated firms. 

Directory retirement 

The directory of certified and assessed people will be retired. The recently launched FCA Firm Checker, designed for consumers, is considered a more useful tool for consumer decision-making.

Consultation timetable 

Both consultations close 22 January 2027. The regulators intend to publish final rules in the first half of 2027, with implementation following in the second half of the year. 

The timeline for the Financial Services and Markets Bill to become law is not yet confirmed, but could be as soon as the end of this year. The regulators are consulting in parallel so they are in a position to change their rules as soon as possible after it becomes law.

Osborne Clarke comment 

The industry is likely to welcome the latest round of reforms to the SM&CR, which aim to create a more focused and flexible regime. Firms with large numbers of certified staff in particular will benefit from the changes in terms of reduced time and cost. However, while the formal compliance and reporting burden will be lighter, firms must still do the right work behind the scenes to make sure staff conduct meets the regulators' standards. 

The phase 2 reforms and the regulators' expected timeline depend on the Financial Services and Markets Bill receiving royal assent. Its progress through Parliament leaves firms time to start planning ahead for implementation.

A less prescriptive approach could enable firms to be more agile; however, coordination between HR, legal, and compliance and risk teams at this early stage of the reforms' progress could help firms avoid conflicts between the various applicable regimes that they have to balance and ensure that these do not cut across each other.

If you would like help navigating the SM&CR phase 2 reforms and their impact on your business, please contact our experts.

Tess Moujaes, a trainee solicitor with Osborne Clarke, contributed to this Insight.