SM&CR Was Built for Banks. Fund Managers Are Paying the Price.
How a regulatory regime designed around banking’s hierarchy creates accountability gaps in distributed fund management
Table of Contents
The Senior Managers and Certification Regime (SM&CR) was built to solve a specific problem: map accountability within large, complex banking institutions. It succeeded at that task. The problem is that fund managers do not operate like banks. They use partnership structures, outsource critical functions, and distribute decision-making across geographies and entities. SM&CR fund manager accountability becomes untethered when applied to this model.
The FCA’s enforcement pattern since 2023 shows the regulator is now testing those accountability gaps. This is not a compliance tightening. This is a regime hitting the boundaries of its original design, and fund managers are discovering what happens when regulatory architecture assumes a corporate hierarchy that does not exist.
SM&CR Was Explicitly Designed for Banking Hierarchy
The FCA and PRA’s own governance documents state this plainly. In their Joint Discussion Paper DP23/3 (30 March 2023), regulators explained that SM&CR “was designed to enable regulators to map out responsibilities within large, internally complex banking institutions” following recommendations of the Parliamentary Commission on Banking Standards after 2008.
The regime works by creating a clear chain of accountability. A Senior Manager Function (SMF) sits at the top of a defined business line. That person owns outcome. Below them sits a certification regime: people must be certified fit and proper to perform controlled functions. The model assumes:
- Clear reporting lines from function to board
- Internal control functions (compliance, risk) report to the board
- Decision-making happens inside the organization
- Outsourcing is the exception, not the structure
This is banking. In banking, a Chief Risk Officer reports to the Chief Executive Officer who reports to the Board. A decision gets made internally and is owned. Accountability is a straight line.
Fund Management's Actual Accountability Structure
Fund managers operate in a materially different way. Partnership structures are standard. A fund manager may have multiple managing partners who sit on no formal board, own no SMF, but make portfolio and business decisions. Outsourcing is structural: administration, custody, compliance, even some portfolio management decisions are delegated to specialist service providers.
Decisions are distributed. A portfolio decision might involve the Chief Investment Officer, a risk committee, and the compliance function. None of them has a single SMF that encompasses “owns the outcome.” The decision moves across organizations. SM&CR fund manager accountability assumes someone owns the outcome. Fund management assumes the outcome is owned by a system.
This is not a hypothetical distinction. The FCA’s CP25/21 (15 July 2025) SM&CR Review notes that the Enhanced regime triggers at £50bn AUM and requires 17 SMFs, versus 6 SMFs for the Core regime. For a £60bn multi-asset manager with significant outsourcing, those 17 SMFs must map to an actual organizational structure that often does not exist in the way the regime contemplates.
A £60bn asset manager with partnership structure and outsourced admin faces regulatory accountability requirements designed for a £100bn bank with employed staff and internal control functions. SM&CR fund manager accountability requirements assume the latter structure and enforce consequences as if it exists.
The Disproportionality Shows in FCA Enforcement Patterns
The problem surfaces in what the FCA has and has not enforced. From 2016 to July 2025, the FCA opened 98 investigations into breaches of the COCON (Conduct of Business) rules that form the accountability backbone of SM&CR. Only 8 resulted in financial penalties. 22 investigations remained ongoing as of July 2025.
That gap between investigations and enforcement is not randomness. It reflects what the FCA itself identified in CP25/21: “Certain elements have become overly complex, duplicative or burdensome, particularly for smaller firms.” When the FCA cannot cleanly map a Senior Manager accountability breach in a partnership-led, outsourced fund management structure, enforcement becomes difficult because the theoretical accountability does not match the actual accountability structure.
The PRA acknowledged this directly in CP18/25 (15 July 2025), noting that “respondents to DP1/23 raised concerns relating to the proportionality of the regime.” Industry bodies requested that regulators “reduce the burden of the current regime by 50 percent.” That is not a request for simplification of compliance documentation. That is a signal that the regime’s accountability assumptions are not proportionate to how fund management actually functions.
SM&CR fund manager accountability becomes burdensome precisely because the liability falls on a person (the SMF holder) who may not control the decision being scrutinized. A Chief Financial Officer at a fund manager who holds the SMF27 (Group Treasury) may face accountability for a liquidity decision made by the Chief Operating Officer and approved by the Risk Committee. The decision was made collaboratively. SM&CR requires someone to own the outcome individually.
What the Proportionality Argument Misses
Some will argue that the solution is simpler compliance, not different accountability structures. The HM Treasury Reforming SM&CR Consultation (15 July 2025) notes that “The regime is more extensive than those implemented in most other jurisdictions, and there is a range of areas where both firms and regulators recognise that elements of the regime can be more burdensome than is necessary.”
But simplifying compliance is not the same as solving accountability gaps. A streamlined SM&CR still requires someone to own outcome. A cleaner template still requires that person to exist. Fund managers using partnership structures and distributed decision-making cannot solve this by filling out cleaner documentation. The accountability model itself does not fit their governance model.
The FCA’s own enforcement data shows this. In their enforcement announcements, the regulator has stated “a great deal of grey area” remains on what constitutes non-financial misconduct reportable to the FCA. That grey area does not exist because the rules are unclear. It exists because fund managers are trying to apply a hierarchical accountability model to non-hierarchical organizations. A grey area means: the accountability assumption breaks when applied to actual fund management structure.
This is where the accountability gap becomes consequential. A fund manager using partnership structure and SMF27 (Group Treasury) as their delegation point will face regulatory uncertainty about who owns outcome when three partners make a decision collaboratively. Simplifying the regime does not resolve that uncertainty. It just makes it faster to prove the accountability was unclear all along.
The FCA's Testing Phase Begins Now
The FCA’s enforcement pattern tells a story. High investigation rate. Low penalty rate. Ongoing cases. This is not a pattern of settled enforcement. This is a regulator testing the boundaries of how SM&CR fund manager accountability works when the actual organization does not match the accountability model.
The regime will not break. SM&CR is law. Fund managers will comply. What will change is that the compliance mechanism will become the de facto accountability mechanism. The SMF holder will become responsible in practice for documenting and approving decisions they may not have made. As I argued in my analysis of why templated compliance frameworks systematically misprice regulatory risk, the more complex the organization and the more the accountability model misaligns with the decision-making model, the higher the probability that compliance documentation becomes the only evidence that accountability exists.
Fund managers that wait for the regime to be reformed will spend years documenting their way into compliance. Fund managers that redesign their accountability structures now, as I discussed in insights on regulatory strategy, will reduce the gap between what SM&CR assumes and what actually happens.
The regime was designed for banks. Banks have hierarchies. Fund managers should stop pretending they do.
This article is provided for general informational purposes only and doesn’t constitute legal, investment, or regulatory advice.
Date: 18 August 2025
Written by: Asad Bukhory