The King’s Speech: SMCR Reform Moves Forward

The context

Reform to the Senior Managers and Certification Regime (SMCR) was announced under Chancellor Rachel Reeves’ Leeds Reforms package, with the aim of reducing the regulatory burden associated with the regime by 50%. Phase 2 of the reforms, which requires legislative change, has been allocated time in the new Parliamentary session and will be taken forward in the Financial Services and Markets Bill, which had its first reading in the House of Lords on 19 May. 

Prior to the announcement of the Bill, consultation exercises had been conducted by HM Treasury, the Financial Conduct Authority (FCA CP25/21, followed by PS26/6) and the Prudential Regulation Authority (PRA CP18/25, followed by PS12/26).

First implemented in 2016 (and then expanded across financial services), the SMCR was a key element of the UK’s response to the Global Financial Crisis of 2007/08; it replaced a previous framework – the Approved Persons Regime – which had been deemed wanting by those examining the crisis. The UK remains one of a handful of jurisdictions which has a standalone individual accountability regime of this type and whilst other jurisdictions may have borrowed elements of the SMCR, none have mirrored its full extent.

While the SMCR has generally been viewed as a good framework for defining the responsibilities of senior individuals within regulated firms and improving governance, it has not perhaps met the original intention of providing a clearer line to enforcement against individuals. There have been no cases under the Duty of Responsibility and, at least as far as public perception is concerned, the SMCR has not led to a noticeable uptick in the number of individuals being subject to enforcement action, whether or not action could have been taken under the previous regime.

For those working in or adjacent to the financial services sector, the perspective is different. Increasingly, industry feedback on the SMCR has focused on aspects which impose a disproportionate administrative burden, or which are overly process driven, particularly as regards the Certification Regime. The forthcoming changes build on this sentiment for change and signal, in line with the Chancellor’s intentions, a fundamental shift away from a prescriptive process towards a more flexible, outcomes-based regime.

The timetable for reforms to the SMCR

The changes to the SMCR have been split into limited 'Phase 1' reforms, which did not require legislative change, and more structurally significant 'Phase 2' reforms, which do need legislation to be implemented. Several Phase 1 reforms have been in force since 24 April 2026, with the remainder scheduled to come into force from 10 July 2026 onwards. 

Phase 1 implementation 

By way of recap, the key changes with effect from 24 April 2026 are as follows: 

• The ‘12‑week rule’: The rule has been amended so that it now applies to the submission of an application for an individual to perform a Senior Manager Function (SMF) rather than the receipt of regulatory approval; this brings it fully within firms’ control (albeit that 12 weeks is still a relatively short time to compile a short list of candidates, carry out interviews and get the application ready). The FCA has also clarified that individuals appointed under the 12-week rule are within scope of the Senior Manager Conduct Rules during this period, and any breaches should be reported as soon as practicable, rather than as part of the firm’s annual return. 
• Statements of Responsibility and Management Responsibility Maps: Firms are now permitted up to six months to notify regulators of changes to the Statements of Responsibilities and Management Responsibilities Maps, reducing the need for frequent reactive submissions.
• Regulatory Reference Requests: The timeframe for responding has been reduced from six weeks to four weeks, which should expedite processing for the requesting firm.
• Criminal Record Checks: These will no longer be required for intra‑group moves, thus removing duplication where appropriate checks have already been undertaken.
• FCA Directory Updates: Firms now have 20 business days to submit information on new certification functions and changes to existing details. However, departures must still be reported within seven business days, maintaining a stricter standard where potential conduct risk considerations are greater.
• Additional Guidance on SMF Functions: This includes changes to clarify the scope and application of the SMF7 (Group Entity Senior Manager) and SMF18 (Other Overall Responsibility). However, the PRA’s extension of the SMF7 function to ‘controllers’ is not mirrored by the FCA.

The PRA’s approach to the SMF7 function diverges from the approach taken by the FCA and is potentially a misstep. It results in the blurring of the boundary between the SMCR, which is focused on individual accountability within firms, and the controllers regime, which is concerned with ownership and influence and has a greater emphasis on financial soundness. If the PRA wishes to strengthen its powers over the owners of regulated firms, it may be more appropriate to do so via changes to the controllers regime (and to do so in tandem with the FCA) rather than tacking it on to the SMCR changes which are generally de-regulatory rather than increasing regulatory reach.

Phase 1 further implementation

The remainder of the key Phase 1 changes being introduced on 10 July 2026 are:

• Enhanced SMCR thresholds: Inflation‑linked uplifts to the thresholds determining Enhanced firm status will reduce the number of firms classified as Enhanced, with a limited number expected to fall within the lower “Core firm” definition instead.
• SMF18 and Prescribed Responsibilities: In solo‑regulated firms, individuals performing the SMF18 (Other Overall Responsibility) function will be permitted to hold any Prescribed Responsibility, removing existing restrictions on allocation. Additional guidance on allocating Prescribed Responsibilities will also be provided. 
• Certification Regime Duplication: The requirement for separate certification in overlapping roles will be removed, including where an individual is already certified as a Material Risk Taker or holds another certification function within the same firm.
• Paperwork: The regulators have allowed themselves 11 weeks to make changes to some of the SMCR forms. 

Phase 2 reforms 

The Phase 2 reforms are set out in the consultation outcome published by HM Treasury; these changes depend on enactment of the new Bill and are intended to provide greater flexibility and proportionality:

• Certification Regime: This part of the regime will be removed from legislation. However, that does not mean it is being removed from the regime. Rather, this will allow the FCA and the PRA to use their rule-making powers to design a more flexible and proportionate framework.
• Senior Managers Regime: HM Government has determined that the primary legislation currently in place does not require regulators to take a particularly expansive approach to designating SMFs; it is not planning to change legislation around designation of roles. However, it will make other changes to allow for fewer SMF applications to be required. It will also amend legislation to enable the regulators to define when pre-approval for SMF roles is required or where notification will suffice.
• Statements of Responsibilities: HM Government will repeal the prescriptive requirements in legislation, allowing the regulators to define how individual accountability should be documented.
• Notification of Conduct Rule Breaches: Prescriptive legislative requirements on firms to notify regulators of breaches and to conduct mandatory training will be repealed, allowing the regulators to introduce a more flexible approach. 
• Limits and Conditions on SMF Applications: The regulators will have the ability to introduce limits and conditions on SMF approvals, allowing for a more nuanced approach to approvals to be taken than a simple ‘yes’ or ‘no’ approach. This is a potential double-edged sword for firms: it may lead to approvals being granted where they might otherwise have been refused, but it also increases the risk of regulators imposing conditions (although enthusiasm for this may be tempered over time if applying conditions to approvals imposes too great an additional administrative burden on the regulators themselves).

Overall, the changes are designed to reduce friction, particularly for smaller firms and new market entrants, while retaining accountability of the most senior people within firms. They also place greater responsibility for the effective and efficient operation of the regime with the regulators. The PRA and the FCA will be able to amend their respective rules to make more significant alterations to the regime than could be accomplished in Phase 1. This might include, for example, a simpler regime, entailing fewer SMF roles, and fewer SMF roles requiring regulatory approval. However, the regulators are likely to find that they are expected to exercise this flexibility to deliver a more responsive regime.

What does this mean for firms?

The overall 'streamlining' objective of the proposed changes is likely to be welcomed by firms, given previously expressed concerns over the impact of the current regime. Retaining the SMCR's core principles and standards, while improving its 'user friendliness' is to be lauded, but much will depend on what the changes deliver in practice. It will be important to ensure that individual changes are properly thought through and unintended consequences are avoided. As already noted, the PRA's widening of the scope of the SMF7 role to controllers is an example of how changes may go awry.

HM Government and the regulators have made much of their efforts to improve the UK regulatory landscape in order to deliver on growth and international competitiveness aims. SMCR reform is only a part of that wider piece, and – even with the promised 50% reduction in administrative burden – the practical impact for dual-regulated or large solo-regulated ‘enhanced’ firms already subject to the regime may be rather muted.

Firms should also be mindful of the weighting which is applied to the SMCR reform. HM Government is aiming for a 25% reduction in ‘administrative costs by the end of this Parliament’ (estimated to be a point in 2029). How much these changes to the SMCR can be said by the regulators to contribute to that 25% should reflect – as genuinely as possible – the reality of firms’ experience. It will also be important to ensure that the 50% reduction in the SMCR burden, once achieved in Phase 1 and Phase 2 reforms, is not subsequently diluted as the regulators flex their new responsibilities; it is possible that this will feature in future remit letters from the Chancellor to the regulators and when the regulators appear before Parliamentary committees.

For firms considering entering or expanding in the UK market, this exercise has demonstrated a willingness on behalf of HM Government to examine and revise a key plank of post-crisis reforms – and to do so relatively quickly; it may prove a strong selling point in strengthening the attractiveness of the UK as a place to do business. It is worth noting that, even with the current version of the SMCR in force, the UK remains in its place as second only to New York in the Global Financial Centres Index (GFCI) 39.

What should firms do now?

Firms should review their certification frameworks, SMF role allocations and governance documentation to ensure alignment with the revised requirements, particularly where these changes offer opportunities to simplify existing structures or remove administrative burdens. New firms will certainly benefit. However, established firms will in some cases need to weigh up the cost of further analysis and disruption to existing processes against the practical gains on offer. 

Footnote

1 Financial Stability Institute, When the music stops - holding bank executives accountable for misconduct, February 2023

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