SM&CR reforms: regulatory references and suspected misconduct

The FCA and PRA have confirmed the first phase of reforms to the Senior Managers and Certification Regime (“SM&CR”), with most changes having taken effect on 24 April 2026. The reforms are intended to make the regime more efficient and proportionate, while maintaining individual accountability.

For regulated employers, the most important changes relate to regulatory references. These help recruiting firms assess whether an individual is fit and proper to perform a Senior Management Function, Certification Function or other relevant regulated role, and are intended to reduce the risk of individuals with serious conduct concerns moving between regulated firms without those concerns being identified.

Shorter timeframe for regulatory references

Under the FCA’s updated guidance, firms are now expected to provide regulatory references within four weeks, rather than six. Although this is guidance rather than a strict rule, it is intended to speed up recruitment and onboarding for regulated roles.

This shorter timetable means firms will need efficient internal processes. HR, Compliance and Legal teams may need to coordinate quickly, particularly where the reference involves adverse information, historic conduct issues or unresolved investigations. Poor records or fragmented processes may make it difficult to respond within the expected timeframe without increasing legal or regulatory risk.

Suspected misconduct and incomplete investigations

The most significant clarification concerns employees who leave before an investigation into suspected misconduct has concluded. This often arises where allegations are raised and the employee resigns before the firm reaches a formal outcome.

The FCA has added guidance relevant to Question G of the regulatory reference template. Question G is the “catch-all” part of the reference, requiring firms to disclose any other information they reasonably consider relevant to the receiving firm’s assessment of the individual’s fitness and propriety. It is therefore not limited to formal disciplinary findings or confirmed Conduct Rule breaches.

This is particularly relevant where an employee resigns before an investigation into suspected misconduct has concluded. Although the updated guidance does not remove the difficult judgement call that firms have to make in these circumstances, it does now expressly state that firms should consider including details of suspected misconduct where an employee leaves before the investigation is complete.

In deciding whether to include that information, firms should consider whether the suspected misconduct would be material enough to disclose if true, whether the firm has good enough grounds for believing the misconduct occurred, whether the information would be relevant to the receiving firm’s assessment of fitness and propriety, whether disclosure would be fair, and whether it would be permissible under privacy, employment and other relevant law. Importantly, firms should not include suspected misconduct unless they have taken sufficient steps to verify the information.

However, the fact that the employee has left before the investigation is complete does not necessarily mean the suspected misconduct must be omitted. In many cases, firms may decide to continue with their investigation so that they can comply with their regulatory obligations, as well as being able to evidence any information included in Question G. In any event, it should be made clear in Question G that the employee left before the investigation concluded and/or any disciplinary process had been completed if this was the case.

This creates a difficult balancing act for firms. Under-disclosure may undermine the regulatory reference regime, while over-disclosure may expose the firm to legal challenge if the information is inaccurate, unfair or inadequately evidenced. The safest approach is likely to be evidence-led, proportionate and clearly documented.

Conduct Rule breaches and disciplinary action

The FCA has also clarified that where there has been a Conduct Rule breach, but no specified disciplinary action has been taken, the breach should not be reported in the disciplinary action section of the template. However, firms should still consider whether it should be disclosed under Question G if it is reasonably relevant to fitness and propriety.

The absence of formal disciplinary action is therefore not necessarily the end of the analysis. Firms should document their reasoning either way.

Why this matters for employers

These changes sit directly at the intersection of regulatory compliance and employment law. They are particularly relevant where employees resign during live investigations, where conduct concerns arise shortly before departure, or where there is pressure to agree a neutral reference as part of an exit.

The guidance does not prevent firms from settling employment disputes, but it does limit the extent to which references can be treated as purely commercial negotiation points. Firms must have regulatory references in mind when negotiating the terms of an exit and ensure that the terms of any negotiated exit do not conflict with the firm’s regulatory obligations, which the firm cannot commercially agree to vary in order to effect a smooth exit.

Other Phase 1 changes

Other changes which took effect from 24 April 2026 include:

• criminal record checks for Senior Manager Function applications being valid for six months rather than three;
• greater flexibility under the 12-week rule;
• periodic submission of updated Statements of Responsibilities and Management Responsibilities Maps;
• more flexibility around certification processes; and
• longer timeframes for certain Directory updates.

Further changes take effect from 10 July 2026, including increased thresholds for enhanced SM&CR firms and the removal of certain overlapping certification requirements. Changes linked to the FCA’s non-financial misconduct rules follow from 1 September 2026.

For firms preparing for the FCA’s non-financial misconduct regime, our webinar with Sonya Zywko and Claire Holland examines the new requirements and what FCA-regulated firms should be doing to prepare, which can be found here: Are-you-prepared-for-the-fca-final-rules-on-non-financial-misconduct?.

Our culture review packages also support firms in taking a phased approach to compliance and culture, helping identify issues and plug gaps while building a more diverse and inclusive workforce.

Looking further ahead, more structural reforms are expected as part of Phase 2, potentially including changes to the Certification Regime, fewer Senior Management Function roles requiring pre-approval, and a more flexible approach to Statements of Responsibilities and Conduct Rules.

What should firms do now?

Firms should review their regulatory reference procedures and ensure they reflect the four-week expectation and updated guidance on suspected misconduct. In particular, firms should check that:

• ownership of regulatory references is clear between HR, Compliance, Legal and the business;
• investigation records are accurate and accessible;
• there is a clear process for deciding what should be disclosed under Question G;
• settlement agreements and reference wording do not cut across regulatory obligations; and
• managers understand the need to escalate conduct concerns promptly.

The reforms provide some procedural streamlining, but they are not a relaxation of firms’ accountability obligations. The practical challenge for regulated employers will be meeting shorter timescales while ensuring references remain accurate, fair and defensible.