Key takeaways

• SMCR was designed to introduce greater individual accountability at every level of financial services firms but attracted criticism for the associated administrative burden, cost and management time.
• These consultations propose changes in two phases. This article draws out some of the key points from an employment law perspective relating to the 12-week rule, Conduct Rule breach reporting and regulatory references, as well as the Treasury's proposal to remove the Certification Regime and replace it with a more proportionate and streamlined model.

To discuss what these developments mean for you and your business, please get in touch with the authors or your usual Baker McKenzie contact.

In more detail

On 15 July 2025 the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and His Majesty's Treasury (HMT) published a series of consultation papers regarding the SMCR. SMCR was designed to introduce greater individual accountability at every level of financial services firms but attracted criticism for the associated administrative burden, cost and management time. This consultation follows the Discussion Paper DP1/23 ("DP") which sought views on the effectiveness of SMCR.

These consultations propose changes in two phases. The first phase is set out in the FCA (CP25/21) and PRA (C18/25) consultation papers which are aligned. The HMT proposals to amend legislation will form the basis of the second phase. This article draws out some of the key points from an employment law perspective relating to the 12-week rule, Conduct Rule breach reporting and regulatory references. It also looks at the HMT proposal to remove the Certification Regime and replace it with a more proportionate and streamlined model.

The 12-week rule

The 12-week rule has historically been challenging for firms to navigate when managing unforeseen departures. Providing for circumstances where a Senior Manager is temporarily or unexpectedly absent, this rule allows somebody to cover for a Senior Manager provided that certain conditions are met. Following responses to the DP that the 12-week period did not allow sufficient time to appoint a replacement Senior Manager and receive regulatory approval, the FCA proposes to improve the efficiency of the 12-week rule.

FSMA requires firms to submit a revised Statement of Responsibility (SoR) when there is a significant change in the matters for which the Senior Manager is responsible. In circumstances of temporary unforeseen absence, the PRA and FCA will no longer expect firms to submit an updated SoR until the individual has been absent for 12 weeks. While the SoR will require updating, in accordance with any reallocation of prescribed responsibilities (PRs), firms will no longer need to file the updated SoR in respect of absences of less than 12 weeks.

The FCA and PRA propose amending the 12-week rule to allow firms 12 weeks to submit a Senior Manager application (as opposed to the current 12 weeks to get a decision on such an application). Provided the application was submitted within the 12-week period, firms would not be in breach of the rule and the individual performing the role could continue to do so under the 12-week rule until the application is determined. Under the PRA proposal, following application within the 12-week period, regulators would have a further three months to review and determine the application.

Under the proposals the individual performing the SMF role under this rule would be subject to the SMCR (rather than just the Individual Conduct Rules) both during the 12-week period and until the application is determined. However, as is currently the case, unless they are an existing Senior Manager, they may not hold PRs prior to the application being approved.

The FCA and PRA both emphasise the importance of succession planning, and the FCA reiterates that it expects the 12-week rule to continue to be used only when necessary. To improve clarity on the use of the 12-week rule, the PRA proposes to add non-exhaustive examples in SS28/15 and SS35/15 regarding the circumstances in which the rule can be used.

While only available in limited circumstances, this change would provide firms with more certainty and reassurance about their ability to operate within the rules in the event of unforeseen departures.

The Conduct Rules

The FCA proposes to provide guidance on the application of the Conduct Rules and related reporting requirements. Most respondents to the DP felt that the Conduct Rules were effective in promoting good conduct and a useful means of setting standards and reinforcing existing behavioural expectations. However, some of the responses asked for further guidance on matters such as non-financial misconduct and highlighted confusion about when Conduct Rule breaches needed to be reported.

As the responses to the DP were generally supportive of the Conduct Rules, the FCA is not proposing rule changes as part of the first phase of the reform. However, they are proposing to provide additional guidance to support firms in their application. Matters relating to non-financial misconduct are being addressed as part of a separate consultation exercise (CP25/18), details of which can be found here.

Reporting of Conduct Rule breaches versus other breaches

The FCA proposes guidance to reaffirm that only breaches where disciplinary action (as defined in FSMA) was taken should be reported as a Conduct Rule breach (whilst noting that the breach may still need to be reported under a different rule, such as PRIN 11 (Relations with regulators), SUP 15.3 (Matters having a serious regulatory impact) or the rules and requirements for the SMCR in SUP 10C (for example, notifications relating to changes to an FCA-approved person's details)).

The PRA consultation notes that dual regulated firms wanted more clarity on the criteria for determining a Conduct Rule breach but that it would be difficult to list all the circumstances and that this would be context-specific. Similarly, the PRA does not propose to provide more guidance on what constitute "reasonable steps" under the Senior Manager Conduct Rules as these will be fact and case-specific.

Suspension and recovery or reduction of remuneration, defined as "disciplinary action"

The FCA proposes to clarify that an investigatory suspension would not be reportable as a Conduct Rule breach under SUP 15.11. Suspension triggers a reporting requirement where it is a form of disciplinary action rather than a step taken before an investigation. In addition, the FCA proposes to include guidance that recovery of or a reduction of remuneration is only reportable under SUP 15.11 if this is a sanction arising from a Conduct Rule breach (where there is personal culpability).

The relationship between Conduct Rule breaches, fitness and propriety and regulatory references

The FCA proposes guidance to clarify that a Conduct Rule breach does not inherently mean that a SMF or Certification function holder is not fit and proper and that this must be assessed on a case-by-case basis. Similarly, the FCA proposes to explain that not all Conduct Rule breaches need to be included on regulatory references. The breach does not have to be included in a regulatory reference if: (i) the firm did not take disciplinary action (in the form defined in section 64C of FSMA) because the conduct was not considered sufficiently serious; and (ii) the firm considers that the breach is insufficiently severe or serious to impact fitness and propriety.

Regulatory references

The first phase of reforms also proposes changes to the FCA guidance about the period in which firms should provide regulatory references upon request from a hiring firm. As part of the DP, the FCA had asked firms whether the regulatory reference regime helped them to make better-informed decisions about the fitness and propriety of candidates. Although firms generally found the regulatory reference regime helpful in assessing the fitness and propriety of candidates, there was criticism that the operation of the regime delayed recruitment of key personnel (where former employers failed to respond or did not respond in a timely fashion). Concern was also expressed about aspects of the regulatory reference template, including the breadth of Question G, which invites firms to provide "any other information that might reasonably be considered relevant to an assessment of whether an individual was fit and proper."

The FCA proposes to amend the guidance to require firms to provide regulatory references within four weeks rather than six. This will not be expressed as a rule, as the FCA acknowledges that this may be challenging in firms with complex structures but it will be an expectation that even those firms respond as soon as possible. The FCA will not make substantive changes to the regulatory reference template but propose to provide guidance about information that may need to be included where an individual leaves before a misconduct investigation has concluded. 

The PRA consultation also proposes to amend Supervisory Statement (SS) 28/15 (paragraph 6.41) and SS35/15 (paragraph 5.41) to confirm that firms need to consider whether to include such information in a regulatory reference. Unlike the FCA, they do not intend to stipulate a time for responding to regulatory reference requests, although they note that the number of roles that require a regulatory reference may reduce in the light of future HMT reforms to the Certification Regime (discussed below).

HMT legislative reform - Removal of the Certification Regime

HMT's consultation contains a number of measures that are designed to streamline SMCR from a legislative perspective. One of the most significant legislative changes proposed is the removal of the Certification Regime. The proposed changes would remove the duty on firms to take reasonable care that no employee performs a Certification Function unless they have been certified as fit and proper to do so. Firms would no longer be required to issue annual certificates confirming that an individual is fit and proper to perform the relevant Certification Function or retain a record of every employee with a valid certificate. Nor would firms be required to notify a person where they have decided not to issue a certificate of the steps that they propose to take in relation to that person and why. HMT envisages that a different rule-based regime would be developed by regulators that would be flexible and proportionate.

Pending the outcome of the HMT consultation, the PRA consultation paper proposes to update SS28/15 (paragraphs 3.13 – 3.15) and SS35/15 (paragraphs 2A.12 – 2A.14) to explain that the firm has discretion to develop their own procedures to assess and record the fitness and propriety of individuals under the PRA's Certification Regime. There is no prescribed format of certificate provided that the firm records the outcome of their fitness and propriety assessment and the relevant affairs of the firm that fall within the remit of the certified person. The firm has discretion as to how it carries out the annual certification process in line with its own processes and procedures.

The PRA consultation paper also signposts potential additional consulting as part of Phase 2, which it would envisage covering proposals to take advantage of any additional flexibility in SMCR arising from HMT's current consultation.

Next steps and con

The consultation paper closes on 7 October 2025.

While there is no immediate impact on firms, the three consultation papers indicate how the FCA, PRA and HMT see the stated government and regulatory ambition of reducing the regulatory burden of the SMCR by 50% being actioned. The most significant changes are likely to arise following the outcome of HMT's consultation on streamlining SMCR from a legislative perspective, including potential replacement of the current Certification Regime, and so would fall within Phase 2, the timeline for which is unclear.

In the meantime, the proposed reduction in the time to respond to regulatory reference requests is expected to increase the burden on firms, who should review their process for responding to such requests and ensure they are set up to be able to respond within this shorter timeframe. On the other side of the coin, the increased clarity and reassurance for firms managing the unexpected absence or departure of a Senior Manager is likely to grant welcome additional breathing room.