Senior manager and certification regime – radical streamline or incremental change?

The SMCR, first introduced in the UK for banks in 2016, has been widely hailed as a success in improving individual accountability in financial services firms with a positive impact on governance, behaviours and culture. It has been emulated by regulators in other jurisdictions. Under the proposed reforms the core principles of SMCR will remain but with amendments to reduce some practical challenges and burdens.

The PRA and FCA consultation papers represent a first phase of SMCR reform, focussing on steps the regulators can take without the need for changes to the Financial Services and Markets Act 2000 ("FSMA"). The HMT consultation concerns removing some of the requirements in FSMA, when parliamentary time allows, thus enabling the FCA and PRA to use their rulemaking powers to develop a more flexible and proportionate SMCR. Thus the current PRA and FCA proposals are only an incremental tweaking of the existing regime. More radical streamlining can only occur if FSMA is amended, in which case both regulators will conduct phase 2 consultations.

FCA and PRA proposals for phase one reforms

FCA threshold for enhanced firms

The financial thresholds above which a solo-regulated firm qualifies as an "enhanced" SMCR firm, with additional regulatory requirements applying, are to be increased by approximately 30% to reflect inflation. The FCA intends to review these thresholds every 5 years.

Senior Management Functions ("SMFs")

Additional guidance is proposed on the application of SMF 7 (Group Entity Senior Manager) and SMF 18 (Other overall responsibility). The FCA expects its guidance to result in a reduction in the number of SMF 7 and SMF 18 applications.

The PRA proposes broadening the definition of SMF 7 for dual-regulated firms to include controllers or their representatives in certain circumstances. The PRA expects that only a relatively small number of existing or future controllers (or their representatives) will require SMF7 approval by virtue of their role and behaviour in respect of a PRA-authorised firm. Individuals would only be in-scope where they have (or plan to have) a continued and sustained involvement in the day-to-day management or conduct of business of a PRA-authorised firm. The PRA would not expect an individual to be an SMF7 where their influence is restricted to operating as a non-executive director in line with the PRA’s requirements and expectations for boards and non-executive directors. Investors could therefore be represented on a PRA-authorised firm’s board as notified non-executive directors without becoming an SMF7.

SMF approval process

The regulators have already taken internal steps to speed up the approval process. The FCA asks for general feedback on the process. The PRA intends to amend its guidance to state that it will consider prior approvals in other jurisdictions with similar individual accountability schemes when assessing fitness and propriety.

12 week rule

In the case of temporary or unforeseen absence of an SMF holder, firms are currently allowed up to 12 weeks of temporary cover before approval for a replacement SMF holder must have been obtained ("the 12 week rule"). The regulators propose to allow firms 12 weeks to file an application for a replacement SMF (whether interim or permanent), with the individual then permitted to continue performing the role pending regulator approval. These individuals must have been assessed by the firm as fit and proper and will become subject to the Senior Manager Conduct Rules, not just the core Conduct Rules.

Firms will still need to reallocate any Prescribed Responsibilities that the absent SMF held to other SMFs. Updated Statements of Responsibility ("SoRs") will not be needed until the absence has reached 12 weeks.

The test for when the 12 week rule can be used will not be changed and both regulators propose additional guidance on correct use of the rule.

Prescribed responsibilities

There will be additional FCA guidance on the allocation of FCA-designated prescribed responsibilities. This will emphasise that Prescribed Responsibilities should only be split between individuals where justified, typically in larger, more complex firms. The FCA does not expect firms to reconsider their existing allocations simply to align with the guidance. The FCA also proposes to permit solo-regulated firms to allocate Prescribed Responsibilities to an individual holding SMF 18 in appropriate cases.

Statements of responsibility and management responsibilities maps

Firms must maintain up to date SoRs at all times. However, more time is proposed for the submission of updated SoRs to the regulators. The FCA proposes to amend the rules for solo-regulated firms so that updated SoRs do not have to be submitted to the FCA immediately and every time a firm makes a significant change but instead could be submitted on a periodic basis no later than 6 months after the last submission. Firms would have flexibility to choose when to submit their updates within the 6 month time limit and could choose to submit together all SoRs that had changed within a relevant period together with a single up to date management responsibilities map. As now, firms that have made no changes to SoRs have no obligations to submit anything following the initial approval. For dual-regulated firms the PRA also proposes that firms have up to 6 months to submit an updated SoR after a significant change but if multiple changes have been made to a SoR in the relevant period all versions must be submitted, not just the latest version.

A similar approach is proposed for management responsibilities maps which should be submitted no later than six months following a significant change in the set of management responsibilities. Firms should amend the Map internally as soon as a significant change in senior manager responsibilities occurs and not delay this until the document is due to be submitted.

Despite concerns about the complexity of management responsibilities maps the regulators do not propose to change the scope of material to be included.

Criminal records checks for senior managers

The current SMF approval application form (Form A) asks for an explanation if the criminal records check was not issued within 3 months prior to the submission of the application. It is proposed to set the validity period for criminal records checks for an SMF candidate to 6 months. A criminal records check will not be required where an existing SMF holder is applying for a SMF in the same firm or group.

Regulatory references

The FCA proposes guidance that firms should provide a regulatory reference within 4 weeks of request, shortening this from the current 6 weeks.

Both regulators propose guidance confirming that if an employee leaves the firm before an investigation into potential misconduct was concluded, firms should consider mentioning the suspected misconduct in a regulatory reference. A firm should not include information about suspected misconduct unless the firm has taken sufficient steps to verify the information. For example, the firm may complete the investigation after the employee leaves or the investigation may have advanced sufficiently far by the time the employee leaves that the firm is satisfied that the misconduct has taken place.

A conduct rule breach does not need to be included in a regulatory reference if the firm did not take disciplinary action because it did not consider the conduct to be serious enough to warrant it and believes the breach is insufficiently severe or serious to impact an assessment of fitness and propriety.

Certification regime

The FCA proposes to remove duplication of certification for certain certification functions. An FCA material risk taker at a dual-regulated firm would not require certification if the individual is also certified for a PRA certification function at the same firm. A significant management function holder would not need certification for this role where the individual is also certified as an FCA material risk taker at the same firm. The "manager of a certification employee" function will not require certification if the individual is already certified for another certification function at the same firm. The FCA considers that this would reduce the number of certification roles by about 15% but this is unlikely to make a difference to the overall number of individuals who are certified.

Both regulators propose additional guidance on the certification process, emphasising that firms have discretion in developing their certification procedures. Annual re-certification can be embedded within existing performance reviews, firms can conduct re-certification proportionately where there are no changes from the previous year, and digital certificates are permitted.

Conduct rules

The FCA proposes additional guidance about when conduct rule breaches need to be reported to it. Behaviours which potentially breach the conduct rules range from minor issues for which formal action by a firm may be disproportionate to matters of serious regulatory concern. Only conduct rule breaches where specified disciplinary action has been taken need to be reported. Firms may adjust remuneration in a range of circumstances. A reduction or recovery of remuneration need only be reported if it was imposed as a sanction for a conduct rule breach.

The FCA also proposes additional guidance about when it might expect notification pursuant to Senior Manager Conduct Rule 4, in particular it is not limited to information about the SMF manager's firm but also covers information about the SMF manager itself that is relevant to the assessment of fit and proper status.

HMT proposals

Financial market infrastructure (FMI) firms

Under the previous government, Parliament legislated for a SMCR to be applied to central counterparties (CCPs), Recognised Investment Exchanges (RIEs), and central securities depositories (CSDs), with the option to extend the SMCR to credit ratings agencies (CRAs). The government does not plan to take forward secondary legislation to apply SMCR to these firms but will take into account responses to this consultation.

Certification Regime

The Certification Regime is established in primary legislation in sections 63E8 and 63F9 of FSMA. The Government proposes to repeal these sections, which will allow the regulators to use their rule making powers, specifically those set out in sections 137A (FCA) and 137G (PRA) of FSMA, to set up a replacement regime in rules.

The aim is to give the FCA and PRA more flexibility to adapt the regime so that it better reflects` the risks posed by different roles and different firms. They would also be able to adjust the rules more easily over time, responding to changes in the sector. This would reduce regulatory burdens for firms while still ensuring that people in the most significant roles are fit and proper. The regulators' current consultations do not discuss what that new rules-based certification regime may look like.

As of June 2025, there are currently about 262,000 functions held by around 139,000 individuals with certificates.

Senior Manager Regime

Sections 59ZA and 59 of FSMA respectively set out the definition of a senior management function and the requirement for prior approval by the regulators of any individual performing such a role. A senior management function is defined as any function that might involve a risk of serious consequences for either the firm or wider UK interests. HMT proposes changes to these legislative provisions to give greater flexibility to the regulators in how they define functions, facilitating an overall reduction in roles that fall within the regime. It is also proposed to allow firms to appoint certain senior managers without pre-approval by the regulators. The statutory requirement in FSMA that currently requires firms to ensure that all senior managers are subject to prior approval by a regulator would be modified. Instead, the regulators' rules could provide a different mechanism for some senior manager roles with pre-approval no longer required, whereas other senior manager roles would continue to require pre-approval by the regulators. For those senior manager roles not requiring regulator pre-approval, firms would be required to ensure that individuals meet fitness and propriety standards and would be required to notify the relevant regulator of such appointments.

The requirement for each SMF holder to have a statement of responsibilities setting out their individual accountabilities has been an integral part of the SMCR. FSMA has a number of prescriptive requirements about how SoRs are provided, maintained and updated. Any ‘significant’ change in allocation of these responsibilities must be reflected in an updated SoR provided to the regulator. The government proposes changes to these requirements to enable the regulators to take a more flexible approach.

FCA and PRA proposals for phase 2

The regulators will issue further consultations once HMT's proposed changes to FSMA are being brought forward. This is likely to be a broad ranging review, including the categories of SMF and prescribed responsibilities, removing SMF roles or reducing pre approvals, further streamlining the SMF assessment process and designing a streamlined regime to replace the existing certification regime in a way that minimises burden and complexity while ensuring fitness and propriety of individuals. Respondents to the current phase 1 consultation are invited to express views on what reforms may be appropriate in phase 2.

Further information

If you would like further information on the matters discussed in this note, including to discuss the likely impact on your firm, please contact one of the authors listed below.