SMF2: The Chief Finance Function Explained
SMF2 is the Chief Finance Function: the Senior Manager responsible for managing a regulated firm’s financial resources and reporting to the board on its financial affairs. It applies to banks, building societies and insurers, and to FCA-regulated firms in the Enhanced tier of the Senior Managers and Certification Regime. This guide explains which firms need an SMF2, what the regulators expect of the person who holds it, how it relates to other functions such as SMF3, and what to look for when recruiting a CFO who can be approved.
What Is SMF2?
SMF2 is one of the Senior Manager Functions set out in the regulators’ rules for the Senior Managers and Certification Regime (SMCR). The function covers the person with responsibility for the management of the firm’s financial resources who reports directly to the governing body on its financial affairs. In most firms that is the Chief Financial Officer or Finance Director, although job titles vary and the function follows the substance of the role, not the title.
Like every Senior Manager Function, SMF2 requires regulatory approval before the person can perform it. The holder has a Statement of Responsibilities setting out what they are accountable for, is subject to the Senior Manager Conduct Rules, and falls within the Duty of Responsibility: if something goes wrong in their area and they did not take reasonable steps to prevent it, they can be held personally accountable.
Which Firms Need an SMF2?
Not every regulated firm has an SMF2. Whether the function applies depends on the type of firm and, for FCA solo-regulated firms, on its SMCR tier.
| Firm type | Does SMF2 apply? | Which regulator approves |
|---|---|---|
| Banks and building societies | Yes | PRA, with FCA consent |
| Insurers within Solvency II | Yes | PRA, with FCA consent |
| FCA solo-regulated Enhanced firms | Yes | FCA |
| FCA solo-regulated Core firms | No | Not applicable; a finance director on the board usually holds SMF3 |
| Limited Scope firms | No | Not applicable |
The distinction between Core and Enhanced firms matters a great deal for finance directors. At a Core firm, the finance director is often a Senior Manager only because they sit on the board, which brings them within SMF3, the Executive Director function. If the firm grows into the Enhanced tier, the role becomes SMF2 in its own right. Our guide to becoming an Enhanced firm explains the triggers and the other functions that come with them, and which SMFs apply at which tier sets out the full picture.
For dual-regulated firms, SMF2 is a PRA-designated function, so the PRA leads the approval and the FCA must consent. Our guide to PRA versus FCA dual regulation explains how that works in practice. The rules themselves are in the FCA’s SUP 10C and the Senior Managers Regime parts of the PRA Rulebook.
What the SMF2 Holder Is Accountable For
The exact responsibilities depend on the firm and are set out in the Statement of Responsibilities and the firm’s responsibilities map. In practice, the SMF2 holder is typically accountable for some or all of the following:
- Financial reporting: the accuracy and integrity of the firm’s financial statements and management accounts, and the relationship with the external auditor.
- Regulatory reporting: the accuracy and timeliness of returns to the PRA and FCA. Our guide to FCA regulatory reporting covers what is involved.
- Capital and liquidity: at banks, the internal capital and liquidity adequacy processes; at investment firms, the ICARA; at insurers, the solvency position and the Solvency II reporting that goes with it.
- Budgeting and planning: the financial plan the board approves and the monitoring of performance against it.
- Treasury and funding: where the firm has a treasury function, the management of funding, liquidity and financial risk.
- Tax: the firm’s tax affairs and the controls around them.
- Prescribed Responsibilities: any Prescribed Responsibilities the firm allocates to the role, which vary by firm type.
The SMF2 holder is also expected to provide effective challenge as a member of the executive team, particularly where commercial decisions affect the firm’s financial resilience. Regulators look for a finance leader who will say no when the numbers require it.
Scenario: A fast-growing investment firm crosses the threshold that moves it from Core to Enhanced. Its finance director has been approved as SMF3 for three years. As part of the transition, the firm applies for her to hold SMF2, updates her Statement of Responsibilities to include the ICARA and regulatory reporting, and recruits a financial controller and regulatory reporting manager to support her. The regulator asks how she will oversee the expanded function; the firm’s answer, backed by the new hires, means the approval goes through without further questions.
SMF2 and Other Functions
The Chief Finance Function sits alongside several other Senior Manager Functions, and the boundaries need to be clear.
| Function | Relationship with SMF2 |
|---|---|
| SMF3 Executive Director | At firms where SMF2 applies, a CFO on the board is approved for SMF2; whether SMF3 is also needed depends on the rules for the firm type. At Core firms, a finance director on the board usually holds SMF3 only. |
| SMF4 Chief Risk Function | Finance and risk often overlap on capital, liquidity and stress testing. The responsibilities map must make clear who owns what. |
| SMF24 Chief Operations Function | Where finance operations or outsourcing sit under the COO, the split must be explicit. |
| SMF11 Audit Committee Chair | The audit committee chair oversees the integrity of financial reporting; the SMF2 holder reports to the committee. |
| SMF7 Group Entity Senior Manager | A group CFO who exercises significant influence over the regulated firm may need SMF7 approval. |
Can the SMF2 holder also hold other functions? Sometimes. Smaller Enhanced firms occasionally combine finance and operations, or finance and risk, in one person. The regulators will look closely at whether one person can perform both properly and whether combining them weakens challenge. Our guide to combining Senior Manager roles sets out the issues.
What Regulators Look For in an SMF2 Candidate
The regulators assess every SMF candidate against the fit and proper test: honesty, integrity and reputation; competence and capability; and financial soundness. For SMF2, competence and capability carries most of the weight. The regulator will want to see:
- a recognised accounting qualification, which is the norm for SMF2 holders though not a formal requirement
- experience of financial reporting and controls at a comparable firm
- direct experience of regulatory reporting in the relevant regime, such as prudential returns for banks, Solvency II for insurers or the ICARA for investment firms
- an understanding of the firm’s business model and its financial risks
- evidence of having worked with boards, audit committees and auditors
- the judgement to challenge executive colleagues when needed
The most common weakness we see in SMF2 applications is a candidate with strong general finance experience but no exposure to the prudential regime the firm operates under. A finance director from an unregulated business, however capable, will struggle to show they can take reasonable steps over capital adequacy or regulatory reporting they have never managed. For significant roles, the regulator may interview the candidate, and questions on the firm’s capital position and reporting are almost certain.
Recruiting an SMF2
An SMF2 search sits at the intersection of finance recruitment and regulatory recruitment. The candidate pool is mostly qualified accountants who have spent at least part of their career in regulated finance, and the best candidates are rarely actively looking. We set out why a specialist approach matters in why an SMF2 search should start with a CFO recruiter.
Practical points for firms recruiting an SMF2:
- Be clear about the regime. Bank, insurer and investment firm finance are different specialisms. Recruit for the one you operate in.
- Look at the team as well as the leader. An SMF2 can only take reasonable steps if they have a capable team. See the finance team behind your Senior Managers and our guide to financial controllers in regulated firms.
- Plan for approval time. Dual-regulated approvals can take longer. Our guide to how long an SMF appointment takes gives realistic timings.
- Consider interim cover. If the outgoing CFO leaves before the replacement is approved, the firm needs cover. The 12-week rule may help in limited circumstances, and an approved interim or fractional SMF is often the safer route.
- Benchmark the package. SMF2 pay varies widely with firm size and sector. Our salary guide gives current ranges.
SMF2 and Finance Leadership Recruitment
Approved CFOs and the finance teams behind them. Every SMF search is led personally by Adrian Lawrence FCA
Executive SMFs
CEO, CFO and COO searches.
→ SMF recruitment services
→ CEO recruitment (SMF1)
Interim and Fractional
Cover while you recruit.
→ Fractional and interim cover
→ The 12-week rule
Every SMF search is led personally by Adrian Lawrence FCA
Frequently Asked Questions
What is SMF2?
SMF2 is the Chief Finance Function: the Senior Manager responsible for managing the firm’s financial resources and reporting directly to the board on its financial affairs.
Does every FCA-regulated firm need an SMF2?
No. SMF2 applies to banks, building societies, Solvency II insurers and Enhanced solo-regulated firms. At Core firms, a finance director on the board usually holds SMF3 instead.
Who approves an SMF2?
At dual-regulated firms, the PRA approves with the FCA’s consent. At Enhanced solo-regulated firms, the FCA approves.
Does an SMF2 need to be a qualified accountant?
There is no formal requirement, but in practice almost all SMF2 holders are qualified, and the regulator will expect strong evidence of competence in financial and regulatory reporting.
Can a group CFO hold SMF2 for a regulated subsidiary?
It is possible where they genuinely perform the function for the regulated firm, but the regulator will look at time commitment and conflicts. A group CFO who influences the firm without performing SMF2 may need SMF7.
Can you recruit an SMF2 for us?
Yes. We recruit permanent, interim and fractional SMF2 holders for banks, insurers, investment firms and other Enhanced firms.
About the Author
Adrian Lawrence FCA is the founder of SMF Capital. He is a Chartered Accountant and Fellow of the ICAEW, holds a practising certificate in his own name, and is a former listed-company Finance Director with a BSc from Queen Mary College, University of London. He founded FD Capital in 2018 and has since built a network of five specialist recruitment practices. As a former Finance Director himself, he leads every SMF2 search personally. View Adrian’s ICAEW profile.
Need an SMF2?
Whether you need a permanent CFO who can be approved for SMF2, interim cover during a vacancy or a fractional finance leader, tell us about your hire. We’ll come back to you the same working day.