UK financial services regulators propose shake-up to senior employee rules

Anne Sammon, employment law expert at Pinsent Masons, was commenting on proposals published by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) as part of the second phase of their review of the SM&CR.

The reforms, which follow legislative changes to be introduced through the Financial Services and Markets Bill 2026, are intended to reduce regulatory burdens on firms while maintaining individual accountability.

The most significant proposal would abolish the regime entirely, together with the requirement to provide or obtain regulatory references for everyone except senior managers.

The regime currently applies to individuals carrying out specified certification functions, including roles capable of having a significant impact on a firm, its customers or financial markets. Firms must identify employees performing those functions, assess their fitness and propriety on appointment and annually thereafter, obtain regulatory references and provide information for inclusion in the FCA Directory. 

Around 139,000 individuals below senior manager level are currently subject to the regime. The FCA estimates that removing the SM&CR could generate annual savings of £133 million for firms.

Sammon said: “Crucially, abolition of certification would not mean the end of employee suitability and competence assessments. The challenge for firms will be ensuring that they continue to properly consider fitness and propriety of relevant staff without the rigor that the current certification framework provides. 

“Firms will need to consider which parts of their current certification framework remain necessary to demonstrate compliance with their continuing regulatory obligations and which processes can genuinely fall away. This is particularly relevant where certification processes are currently embedded within performance reviews, annual appraisal cycles or HR systems,” she said.

The FCA has proposed relying instead on existing requirements including the competent employee rules, which require firms to employ individuals with the necessary skills, knowledge and expertise. The regulator said firms would still be expected to assess honesty and competence on appointment and reassess suitability where circumstances warrant further review.

Sammon said: “The proposal to remove regulatory references for everyone except senior managers is likely to be of particular concern to employers, particularly as firms are still expected to assess honesty and competence on appointment. A clean regulatory reference provides an employer with real comfort, particularly on these issues – adapting recruitment processes to deal with the abolition of these is likely to add another layer of complexity to the process”

Relevant qualification requirements, including those applying to retail investment and mortgage advisers, would remain in place.

The consultation also proposes changes to conduct rules training and breach reporting requirements.

Current rules require firms to take “all reasonable steps” to ensure relevant staff understand the rules and how they apply to their roles, including through appropriate training. Under the proposals, firms would no longer be required to provide specific conduct rules training and could instead choose the most appropriate way to comply with the requirement.

Sammon said: “Removing the prescriptive training requirement should give firms greater flexibility, but that does not necessarily mean that formal training should disappear.

“Some areas of the conduct rules, particularly the recently introduced approach to non-financial misconduct, involve nuanced questions about workplace conduct and where regulatory boundaries lie. Firms may find these issues difficult to address effectively outside a structured training environment.”

The FCA has also proposed raising the threshold for reporting conduct rule breaches. Currently, firms must notify the regulator whenever disciplinary action is taken for misconduct amounting to a breach of the conduct rules. Under the proposals, for most employees who are not senior managers, only disciplinary action resulting in a final written warning or dismissal would need to be reported.

Other proposed reforms include moving a number of senior management functions to a streamlined notification process rather than requiring regulatory approval, increasing the thresholds at which firms become subject to the enhanced SM&CR regime, and reducing the number of prescribed responsibilities that must be allocated to senior managers.

The FCA has acknowledged that abolishing certification would represent a substantial change and is seeking views on alternative approaches, including retaining elements of certification for some certification functions.

“Employers should avoid making major changes to existing certification arrangements before the consultation concludes,” Sammon said.

Both FCA and PRA consultations close on 22 January 2027. The FCA intends to publish final rules in the first half of 2027, with implementation proposed around six months later.