Time’s Up: Reforming the 12-Week Rule under SMCR

As part of the FCA’s recent changes to the Senior Managers and Certification Regime (the full Policy Statement for which can be viewed here: PS26/6), one practical area of interest for firms is likely to be the so-called 12-week rule. In this article, we explore how it has changed, and what this means for firms that wish to use it. 

Previously, firms were given a 12-week ‘grace’ period in which a senior management function (SMF) could be covered by someone who did not have FCA approval, provided that:

• the absence was temporary or reasonably unforeseen; and 

• the appointment was for less than 12 consecutive weeks. 

The role could not be covered by an unapproved person beyond the 12-week mark. The idea was that this would provide enough time for a permanent replacement to be recruited and approved by the FCA. However, firms often struggled to submit a full application and get this approved within 12 weeks. Further, there was the potential for uncertainty over what would legitimately be considered as “temporary” or “reasonably unforeseeable”. Looking back to the original Discussion Paper from 2023, around 40% of respondents disagreed or strongly disagreed that the rule provided sufficient help to firms in managing changes in SMFs.

Under a new section of the FCA Handbook, the FCA has built out the framework of the 12-week rule. Now, firms will be able to extend the 12-week rule provided they have submitted a valid and complete application for the approval of a replacement senior manager to the FCA within this time. The grace period will then continue until the application is determined. 

Alongside this, the Handbook offers new, practical examples of use and misuse of the 12-week rule, which we have summarised below:

Examples of acceptable use

• Upon giving unexpected notice of their termination, a senior manager immediately stops carrying out their senior management functions, instead working as a consultant for the duration of their notice period.

• A senior manager takes parental leave on short notice (although in other cases of parental leave a firm should generally have systems in place to try to avoid or minimise the use of the rule). 

• A senior manager unexpectedly becomes sick and, immediately after, resigns or takes sick leave. 

• A senior manager gives notice that they are going to take a short career break (under 12 weeks). However, they then unexpectedly give notice of their resignation shortly after going on leave.

• While a replacement is covering for a senior manager, the firm withdraws its initial application for approval of a permanent candidate and replaces it with another. This application is submitted within the 12-week window, allowing the replacement to continue working under the 12-week rule until the outcome of this application. 

Examples of misuse

• The firm and a senior manager agree a retirement plan a year in advance. At the end of the year, the senior manager gives short notice in accordance with the plan.

• A senior manager is employed on a fixed-term contract and there is no suggestion that they will stay after this. At the end of the fixed term, the senior manager leaves.

• A senior manager gives long notice of resignation. However, they become ill and have to resign shortly before the expiry of their notice.

• A senior manager gives long notice that they are going to take extended leave of 1 year. After going on leave, they unexpectedly resign by giving the notice required by their contract of employment.

• A senior manager takes extended leave as expected. The first replacement is in office for 10 weeks, but the firm then replaces them with a second individual and wishes to use the rule for longer than the remaining 2 weeks.  

The requirement that the individual appointed under the 12-week rules is fit and proper to perform their role is intended to further strengthen the rule and reduce its misuse, albeit there is a degree of proportionality in play given the assessment “may take into account that the replacement will only be in post for a limited period”.

What this means for firms

Overall, the FCA’s changes to the 12-week rule give firms more operational flexibility to cover unexpected senior management gaps, by allowing cover to continue beyond 12 weeks where a valid, complete application is submitted within that period. The new Handbook guidance should reduce uncertainty by clarifying what counts as “temporary” or “reasonably unforeseeable” and flagging instances the FCA views as misuse of the rule. The FCA is clear that firms should still make use of succession plans and notice periods to undertake their recruitment rather than overly rely on the 12-week rule.

Firms should therefore put in place tight succession and contingency planning, and when the rule is used ensure early submission of valid and complete applications, while keeping clear records supporting reliance on the rule and appropriate fit and proper checks. 

Written by Emily Williams and John Roberts

If you would like to discuss any of the recent changes, please get in contact with James Green, John Roberts or your usual Burges Salmon contact. 

Our aim is to balance giving firms more flexibility in using the 12-week rule with making sure individuals do not perform SMF roles for long periods without approval.

https://www.fca.org.uk/publication/policy/ps26-6.pdf