FCA SMCR Review: Phase 2 consultation – further streamlining

The FCA expects to publish final rules in H1 2027 and then to implement the changes around 6 months later in H2 2027, assuming that, as is likely, the Financial Services and Markets Bill, which includes the removal of a number of SMCR changes from legislation, has received Royal Assent by then.

By way of summary, the key proposals set out in the FCA's consultation paper, many of which will be welcome, are as follows:

• Certification Regime: As expected, the FCA is proposing to delete this entirely. However, firms will still need to ensure that individuals in relevant roles are competent and suitable, and individuals who currently perform certification functions will remain subject to COCON. The requirement for regulatory references for individuals who were previously certified is being removed (although SMF approvals and notifications will still require regulatory references). The Directory will also be removed and firms will no longer need to provide information on Directory Persons. The FCA does ask which features should be retained if the Certification Regime, regulatory references or the Directory are not removed, although any non-removal is unlikely. Because of the likely removal of the certification regime, the FCA is suggesting renaming SMCR as the "Senior Managers and Conduct Rules regime".
  
  
• Enhanced Scope SMCR firm thresholds: The thresholds to become an Enhanced Scope SMCR firm are being revised upwards again:

• Changes to the 12-week rule: The current "12-week rule" will be extended so that a person will only need to be approved as an SMF if they are covering a temporary absence for up to 18 weeks. The absence will no longer need to be "reasonably unforeseen". It should be noted that this relates only to FCA-regulated firms and FCA functions in dual-regulated firms. The PRA is retaining the "reasonably unforeseen" requirement in its framework. The FCA is nonetheless seeking views on whether it might be simpler to retain the "reasonably unforeseen" requirement for FCA functions in dual-regulated firms, so that they apply one consistent standard within the business.
  
  
• Statements of Responsibility (SoRs): The FCA is removing the requirement to file a Form J and submit an updated SoR whenever responsibilities change. An SoR will still be required where a firm is applying for SMF approval (or notifying an SMF under the proposals above), and firms must still retain records of any superseded SoRs for at least 6 years (or 10 years for a dual-regulated firm). Where only one individual within a firm performs SMF roles (i.e. in a smaller, less complex firm), the requirement for an SoR is being removed. However, if the firm later adds another SMF, all SMFs will need SoRs at that point.
  
  
• Management responsibility maps (MRMs): MRMs, for those firms currently required to maintain them, will no longer be required where one individual performs all SMF roles within a firm. Firms will no longer need to file MRMs with the FCA routinely, but will need to retain them internally and be able to provide them on request.
  
  
• Prescribed responsibilities (PRs): The FCA is deleting most prescribed responsibilities, so that for core firms, the only prescribed responsibilities that will remain will be:
  • current prescribed responsibility (A) Responsibility for the Senior Managers Regime;
  • current prescribed responsibility (D) Responsibility for Financial Crime; and
  • current prescribed responsibility (Z) Responsibility for CASS.

Enhanced Scope SMCR firms will also be subject to PR (J-3) Responsibility for Oversight of Outsourced Internal Audit.

• Process changes: Firms will no longer need to provide a summary of any SMF handover document with an SMF approval application (but where applicable to a firm, the obligation to ensure an effective handover still applies). The requirement for MiFID firms to include MiFID annexes in approval applications is also being removed.
  
  
• Conduct Rules training: The requirement for firms to take "all reasonable steps" to ensure relevant staff understand their obligations under COCON is being deleted from legislation. The FCA is proposing that it should be replaced by a more proportionate requirement to ensure that staff who are subject to the Conduct Rules are notified of the rules that apply to them and the consequences of breaching those rules.
  
  
• COCON breach reporting for non-senior managers: For staff who are not subject to the Senior Manager rules in COCON, reporting of breaches will only be required where the staff member received a final written warning or dismissal in relation to the breach. The FCA is also proposing to give more flexibility about the timing of breach reporting, allowing firms up to 14 months from the date of disciplinary action to notify, and the report should cover only the final disciplinary outcome after any appeal. There will be general guidance that firms are not expected to determine whether every incidence of minor misconduct might amount to a breach of COCON – that determination would be required where the conduct results in disciplinary action which could be reportable.
  
  
• Dual-regulated and solo-regulated Enhanced Scope SMCR firms: In addition to the above, there will be other impacts for dual-regulated and solo-regulated Enhanced Scope SMCR firms:
  • SMF5 (Head of Internal Audit), and SMF10 – 15 (Chair of the Risk / Audit / Rem / Nomination / With-Profits Committee respectively) will become notifiable only. This means that they will not need FCA pre-approval. However, before submitting a notification, the firm will still need to carry out an F&P assessment, including criminal record checks and regulatory references, and will need to prepare a SoR.
  • The FCA notes that the Financial Services and Markets Bill (currently going through Parliament) would still give it the power to impose a requirement on some firms to obtain pre-approval for the above functions in the same way as today. It suggests it might do this in exceptional cases where it has serious concerns about a firm's governance or ability to carry out F&P assessments, or the relevant role in a specific firm is so important to the firm's safety and soundness that pre-approval would remain appropriate.
  • As part of the transition to the new notification regime for these functions, firms would be able to start notifying one month before the new rules commence. If an application for pre-approval is still "in flight" at the commencement date, the FCA will still continue to determine it.
  • SMF18 (Other Overall Responsibility) and SMF22 (Local Responsibility) are being deleted entirely. Any prescribed responsibilities held by SMFs holding these functions will need to be reallocated to other SMFs.
  • The FCA will also amend SYSC 26 and COCON to allow greater use of delegation and layered management frameworks.
  • SMF7 (Group Entity Senior Manager) currently applies where an individual within a group can exercise significant influence over the activities of an SMCR firm. This has caused some firms to adopt a cautious approach to SMF 7 applications (e.g. in seeking approval for some group executive directors and NEDs) in circumstances where this potentially goes beyond what is required. The FCA is now proposing to clarify SMF7 by stating that it will apply only where an individual both exercises significant influence over the SMCR firm's activities and also performs one of certain specified group (or sub-group) functions, being CEO, CFO, CRO, COO, Chair of the Governing Body, Compliance Oversight or MLRO roles. So, for example, a Group CFO who does not exercise significant influence over an SMCR firm does not need to be approved as SMF7.
  • The FCA is proposing that it would consider exercising its new powers under the FSM Bill to approve an SMF application with conditions or time limits only in relation to dual-regulated firms, solo-regulated firms in dual-regulated groups, and Enhanced Scope SMCR firms, as it doesn't consider there would be sufficient demand among other sorts of firms.

All firms and trade associations should note the fact that Christmas and New Year period falls within the consultation period and allow sufficient time to digest the proposals, assess the impact and pull together responses. For the majority of firms most of the changes are likely to be beneficial and they should start to anticipate how best to ensure that the simplification of the rule requirements can be reflected by changes to internal processes and procedures with effect from H2 2027.

We have advised a number of firms on the implementation of the SMCR Phase 1 changes and can help with regards to any questions you might have about how to make the Phase 2 changes to internal processes and procedures as efficiently as possible so as to give effect to the intended streamlining. Please get in touch with one of the individuals named below or your usual Travers Smith contact.