Consultation paper CP26/37 Senior Managers & Certification Regime review: Phase 2

The stated aim of the Phase 2 changes is to continue to reduce the regulatory burden of the SM&CR on firms. The proposed reforms are considerably more extensive than the initial reforms already introduced in April 2026, and involve the removal of significant elements of the SM&CR framework as it currently operates. In the table of key reforms below, we have outlined some of the key proposed changes and set out the benefits and the potential challenges these may bring.  

The most significant proposed change is the complete removal of the Certification Regime. That is not unexpected, as the proposal was first indicated by the then Chancellor, Rachel Reeves, in her Mansion House speech in November 2024. At that time, it was understood that the Certification Regime would be replaced by more proportionate, rules-based requirements to be developed by the FCA and PRA.

The consultation, however, proposes to abolish the Certification Regime without introducing a specific replacement framework. Instead, it would extend the existing guidance on competence and suitability in the systems and controls requirements in the FCA handbook (SYSC 3.1.6R and SYSC 5.1.1R). Former certification staff will also remain subject to the FCA / PRA Code of Conduct as will many of their colleagues.

If adopted as policy, the proposals would mean that candidates for a number of SMF roles in firms will no longer require pre-approval by the regulators.  Their firms will still be responsible for assessing their fitness and propriety, but the process of pre-approval would instead be replaced by a process of notification to regulators.  The regulators are however (in line with the current draft FSM Bill) proposing to retain the right to require some firms to go back to a pre-approval process in what they suggest will be exceptional cases where there are regulatory concerns over the firm and its governance. 

Further, individuals performing what are currently certain senior manager functions (SMF7, SMF18 or SMF22) together with Certified staff, would no longer be subject to ongoing fitness and propriety assessments, despite continuing to hold positions of significant responsibility within firms.

Firms would therefore need to consider how best to assess and manage the risks associated with those individuals in carrying out their responsibilities, particularly in relation to competence and capability, which are currently subject to annual review under the fit and proper framework.

The responsibilities and accountability currently assigned to any senior manager functions which do not go forward in the regime (SMF7, SMF18 and SMF22 holders) would need to be reallocated among the remaining Senior Management Function holders. Those individuals would also need to consider how they evidence compliance with the Duty of Responsibility and the Senior Manager Conduct Rules, particularly the reasonable steps taken to ensure effective delegation, oversight and reporting lines in the absence of the Certification Regime. 

Please click here to read our table of key reforms.

The proposed Phase 2 reforms would, if adopted, represent a significant lightening of the administrative load deriving from the existing SM&CR. This will no doubt be welcomed.  

Firms and senior managers should, however, bear in mind that the regulators will retain their existing intervention, investigation and enforcement powers should the reforms go ahead. Many core aspects of the SM&CR (such as the Code of Conduct and the Duty of Responsibility) are expected to remain. In our view, the reforms are unlikely to reduce the overall risk of regulatory intervention, investigation and enforcement.

Perhaps counter-intuitively, some of the proposed reforms could potentially increase investigation and enforcement risk. As the regulators recognise, for example, there is a risk that some of the proposals might loosen the regime to the point where unsuitable individuals are appointed to senior management roles, or allowed to discharge them for a temporary period, when they might not otherwise have been under the current system.  Intervention, investigations and enforcement action could potentially become more likely in such cases.

Similarly, contemporaneous evidence of fitness and propriety assessments, the allocation of prescribed responsibilities, management responsibility maps and statements of responsibilities, can all be vital to the outcome of a regulatory investigation. The review of potential breaches by staff, and the reporting of them where required, will continue to be important, as will regulatory references. Firms and senior managers will need to maintain a rigorous approach to these, as amended, despite the fact that there would be fewer regulatory filings in the future. The regulators will expect firms to be able to provide accurate and up to date SM&CR related records quickly upon demand, with the risk of action being taken if they are found to be unavailable. 

Although the proposals set out in the consultation may yet be refined, we expect the Policy Statement, anticipated in H1 2027, to be broadly consistent with the proposals as currently framed. On that basis, firms would have a six-month transition period in H2 2027 to move from the existing SM&CR framework to the proposed Senior Managers and Conduct Rules Regime.

Until then, SM&CR remains fully in effect and continues to apply in the usual way.