SM&CR Reforms: FCA CP26/37 Chapter 4 - Proposed Abolition of the Certification Regime and FCA Directory
The Financial Conduct Authority (FCA) is proposing to abolish the Certification Regime, the part of the Senior Managers & Certification Regime (SM&CR) that requires firms to assess and certify the fitness and propriety of staff below Senior Manager level every year. The proposal is set out in CP26/37, Senior Managers & Certification Regime Review: Phase 2, published on 22 October 2026. The consultation builds on the Phase 1 reforms in PS26/6 and is being taken forward alongside the Financial Services and Markets (FSM) Bill 2026, which would remove the Certification Regime from legislation altogether.
This is the second article in Compliance Angle's three-part series on CP26/37. The first article examined Chapter 3 and the proposed changes to the Senior Managers Regime, and the third article covers Chapter 5 and the Conduct Rules.
Here we focus on Chapter 4, which proposes three linked changes: the abolition of the Certification Regime, the end of regulatory references for previously certified staff, and the retirement of the FCA's Directory of certified and assessed persons. We explain what each proposal involves, which existing requirements the FCA expects to take the place of certification, and why its invitation to comment on alternative approaches matters. These are consultation proposals rather than final rules. Until any changes take effect, firms must continue to certify staff, obtain regulatory references and keep the Directory up to date.
What Does Chapter 4 of CP26/37 Propose?
The Certification Regime currently sits in legislation, and the regulators must designate certain roles as certification functions. For staff in those functions, firms must meet four requirements:
Assess fitness and propriety on appointment (a legislative requirement).
Reassess and certify fitness and propriety every year after that (a legislative requirement).
Obtain regulatory references (an FCA requirement).
Report up-to-date information for publication in the Directory (an FCA requirement).
The FCA's case for change rests on cost and on international comparison. It notes that most jurisdictions with regimes similar to the SM&CR have not introduced an equivalent of the Certification Regime. Firms told the FCA that certification creates administrative work beyond normal employment practice without clear evidence that it improves accountability or consumer protection. They also said that identifying who performs a certification function can be complex, and that annual recertification is particularly burdensome for limited benefit. According to respondents, the regime involves tracking around 139,000 individuals performing approximately 261,000 functions.
The FCA's cost benefit analysis puts the annual saving from removing the Certification Regime at £133.04m (central estimate, within a range of £79.25m to £257.04m). Of this, £116.94m is attributed to the Phase 2 proposal and the rest to the Phase 1 changes This is the largest single saving in the Phase 2 package. Retiring the Directory would save a further £0.86m a year, over and above the Directory costs already counted in the certification figure.
Chapter 4 is relevant to every SM&CR firm with certified staff, including third-country branches, and to firms that report other individuals to the Directory, such as non-SMF directors and AR staff in roles requiring qualifications. Cryptoasset firms seeking authorisation should also read PS26/13, which sets out the FCA's "modification by consent" approach to the Certification Regime for those firms. Dual-regulated firms should read the PRA's CP14/26 alongside CP26/37.
The Main Proposals for Certification, References and the Directory
Removing the Certification Regime in Full
The FCA proposes to remove the Certification Regime completely. It does not propose a reduced version, a shorter list of functions or a longer certification cycle, although it invites views on alternatives (see below).
The FCA acknowledges that the risks may increase to a limited extent. Staff currently in certification functions would no longer receive the same structured fitness and propriety assessment as a Senior Manager, and firms might place less emphasis on documenting their assessments. Its conclusion, however, is that the regime no longer provides enough additional regulatory benefit, relative to its cost, to justify a standalone regime. It considers that the same objectives can be met more proportionately through existing competence and suitability requirements operated through firms' own processes.
What Would Take the Place of Certification
This is the central point for firms to understand. The FCA is removing a formal process, not the expectation that relevant staff are fit, proper and competent. Firms would remain responsible for ensuring that individuals in relevant roles are competent, suitable and meet appropriate standards of conduct. The FCA points to five existing sets of requirements that would continue to apply:
The competent employees rules in SYSC 3.1.6R and SYSC 5.1.1R, which require firms to employ personnel with the skills, knowledge and expertise needed for their responsibilities. Under these rules, most firms are expected to assess an individual's honesty and competence on appointment and whenever there is reason to reassess their suitability.
The Conduct Rules, which would continue to apply to individuals currently in certification roles.
Training and Competence (TC) requirements, including the qualification requirements for retail investment and mortgage advisers in TC 2.1, TC App 1 and TC App 4, and the wider provisions of TC 1, 2 and 3 and TC App 1 and 3.
The Statement of Professional Standing (SPS), which must continue to be renewed annually for retail investment advisers, independent financial advisers and wealth managers.
The Consumer Duty expectation that staff are adequately trained and have the skills, knowledge and expertise to support good outcomes for retail customers.
The FCA also expects firms to continue assessing competence through standard employer practices such as performance management, employment checks and referencing.
One group would see an extension rather than a reduction. The guidance on competence and suitability under SYSC 3.1.6R and SYSC 5.1.1R does not currently apply to insurers, managing agents or the Society of Lloyd's. The FCA proposes to extend it to them, so that standards do not fall for individuals performing equivalent roles.
The practical difference is in frequency and form. Instead of a mandatory annual certificate, firms would assess honesty and competence on appointment and whenever there is reason to reassess. The FCA describes this as a more proportionate and efficient approach that will deliver similar outcomes.
No Regulatory References for Previously Certified Staff
Regulatory references were designed to help firms identify conduct and suitability concerns when recruiting. Firms told the FCA that, for certified staff, the references rarely add value beyond other checks, slow down recruitment and are difficult to manage for a large population, often in roles with short notice periods.
The FCA proposes that firms would no longer need to obtain regulatory references for individuals who were previously certified. Firms would remain responsible for assessing each candidate's competence and suitability and could use employment references or other checks to do so. Regulatory references would still be required for candidates for SMF roles, whether approved or notified. Chapter 5 of CP26/37 also proposes changes to the regulatory reference template to reflect revised breach reporting thresholds.
Retiring the FCA Directory
The Directory of certified and assessed persons lists certified individuals, sole traders and AR staff in roles requiring qualifications, as well as non-SMF directors.
Firms must keep the information up to date and attest to its accuracy each year. For customer-facing roles, entries include the customer engagement method, workplace location and professional body memberships.
The FCA proposes to retire the Directory and remove the requirement to provide information on Directory persons. It sets out several limitations of the Directory in support of this:
some users believe the FCA approves or verifies the individuals listed, which it does not;
it contains no contact details and offers no way to verify a person's identity;
its focus on individuals rather than firms can confuse consumers about whom to contact;
consumer protections, including Financial Ombudsman Service and Financial Services Compensation Scheme rights, apply at firm level, not individual level; and
firms incur ongoing costs in maintaining it.
The FCA considers that its new FCA Firm Checker, which lets consumers check whether a firm is authorised and has the relevant permissions and gives firm contact details, is a more effective tool for consumers. Information on firms and SMF holders would remain on the FCA Register. The FCA accepts that some information on individuals would no longer be available from an FCA-maintained public source, but considers this proportionate.
For principal firms, retiring the Directory would also end Directory reporting on AR staff. Firms should note, separately, that Chapter 3 proposes to stop collecting information on non-SMF directors of MiFID firms through the management body notification forms.
Alternative Approaches the FCA Is Inviting Views On
The FCA recognises that removing the Certification Regime is a significant change that could introduce risks. It invites views on keeping some beneficial elements, giving three examples:
Keeping some or all certification requirements for a subset of the eight certification functions.
Keeping regulatory references for individuals in particular roles.
Maintaining elements of the Directory.
It asks for evidence of the value of keeping these elements, estimates of costs and benefits, and views on unintended consequences. Importantly, the FCA says that if it decides to keep or amend parts of the Certification Regime or the Directory, it does not intend to reconsult. In other words, this consultation is the only formal opportunity to influence what, if anything, survives.
Key Themes in the Certification Regime Proposals
Three messages run through Chapter 4. First, responsibility is moving from a prescribed regulatory process to firms' own employment and competence arrangements. The standard does not change: staff must still be competent, honest and aware of the conduct expected of them. What changes is that the FCA would no longer prescribe the annual timetable, the certificate or the reporting. Reflecting this shift, the draft Handbook text uses "Senior Managers and Conduct Rules Regime" as a placeholder name for the regime.
Second, the FCA openly accepts some additional risk in exchange for lower costs, in line with its wider "rebalancing risk" approach. Its cost benefit analysis states that the effect on accountability, conduct and consumers is uncertain and cannot be estimated robustly. Third, nothing changes yet. The FCA has said it considered implementing the certification changes sooner but will not take any steps to repeal the regime before reaching a final policy position.
In our view, the main risk for firms is to treat the abolition of the Certification Regime as the removal of the need to document fitness and propriety decisions. The FCA itself identifies less documentation as a likely consequence. Where a conduct or competence issue later arises, firms will still need to show how they satisfied themselves that the individual was suitable. A proportionate, documented assessment on appointment and when circumstances change is likely to remain the most defensible approach.
What Should Firms Do Now
Firms should not dismantle their certification arrangements yet. Until final rules take effect, annual certifications that fall due must still be completed, regulatory references must still be obtained, and Directory information must still be updated and attested. Before then, the useful work is to understand what certification currently does for the firm and what would need to remain. We suggest that firms consider the following steps:
Map the current position. Identify the staff currently certified, the functions they perform and the Directory persons the firm reports, including AR staff and non-SMF directors where relevant.
Run a gap analysis against the remaining requirements. Check that the firm's competence, suitability and honesty assessments would meet SYSC 3.1.6R and SYSC 5.1.1R, the TC sourcebook and the Consumer Duty on their own, without the certification process.
Decide what to keep. Some elements of certification, such as structured reviews for customer-facing advisers or staff with significant influence, may be worth keeping as internal good practice, particularly where they already support TC or SPS obligations.
Review recruitment and referencing policies. Plan how references for previously certified roles would be handled after implementation, while keeping regulatory references for SMF candidates.
Prepare for the guidance extension. Insurers, managing agents and the Society of Lloyd's should assess how the extended SYSC competence guidance would apply to them.
Plan HR and system changes. Identify contracts, HR policies, attestations and systems that refer to certification, so they can be updated once final rules are published.
Consider responding. Because the FCA does not intend to reconsult if it keeps elements of the regime, firms that value parts of certification, references or the Directory should say so, with evidence, by 22 January 2027.
Consultation Deadline and Next Steps
The consultation closes on 22 January 2027. The FCA expects to publish final rules in a Policy Statement in the first half of 2027 and proposes to implement them about six months later, in H2 2027. The removal of the Certification Regime depends on the FSM Bill receiving Royal Assent, because the regime is currently set out in legislation. Firms should treat the timetable as provisional and keep their current certification cycle running until the final rules confirm otherwise.
How Compliance Angle Can Help
Compliance Angle helps FCA-regulated firms understand and prepare for changes to the SM&CR. Our support is practical and proportionate, tailored to each firm's business model, permissions, size and the roles it currently certifies. Depending on the firm's needs, this can include:
SM&CR support, including a gap analysis of current certification arrangements against the requirements that would remain;
designing or updating fitness and propriety, competence, recruitment and referencing policies that work without the Certification Regime;
compliance training so that staff and managers understand the standards that continue to apply; and
ongoing compliance support to manage the transition and monitor competence arrangements once certification ends.
If you would like to discuss how the proposed abolition of the Certification Regime may affect your firm, please contact us at info@complianceangle.co.uk.
Source: Financial Conduct Authority, CP26/37: Senior Managers & Certification Regime Review: Phase 2, published 22 October 2026.
