SMF3: The Executive Director Function Explained
SMF3 is the Executive Director function: the Senior Manager Function that applies to employees who sit on the board of a regulated firm. It is one of the most common designations in the Senior Managers and Certification Regime, because it applies across Core and Enhanced firms, banks and insurers. It is also one of the most often misunderstood. This guide explains who needs SMF3, what it means to hold it, how it fits with other functions such as SMF2 and SMF18, and what firms should consider when appointing an executive director.
What Is SMF3?
SMF3 covers executive directors: members of the firm’s governing body who are also employees, as opposed to non-executive directors. The rationale is simple. Anyone who sits on the board and takes part in running the business is in a position to influence the firm’s conduct, so the regime makes them a Senior Manager with personal accountability.
Holding SMF3 means the person needs regulatory approval before taking up the board seat, has a Statement of Responsibilities, is subject to the Senior Manager Conduct Rules and falls within the Duty of Responsibility. The rules sit in the FCA’s SUP 10C, and the FCA’s SMCR pages explain how the regime applies to each type of firm.
Who Needs SMF3?
SMF3 applies to executive directors across most of the regime. The main situations are:
| Firm type | When SMF3 is typically needed |
|---|---|
| Core solo-regulated firms | Executive directors on the board, including finance directors, operations directors and sales directors, unless they hold another SMF that covers the role |
| Enhanced solo-regulated firms | Executive directors who are not already approved for a more specific function such as SMF1, SMF2 or SMF24 |
| Banks and insurers | Executive directors not otherwise approved; for dual-regulated firms, SMF3 is an FCA-designated function |
| Limited Scope firms | Generally not; Limited Scope firms have a narrower set of functions |
The detail varies by firm type, and in many cases an executive director who already holds a more specific function, such as SMF1 Chief Executive or SMF2 Chief Finance Function, will not need to be separately approved for SMF3. Firms should check the rules for their own category before applying. Our guide to which SMFs apply at which firm tier sets out the overall structure.
Why SMF3 Matters So Much at Core Firms
At a Core firm, the list of Senior Manager Functions is short: chief executive (SMF1), executive director (SMF3), chair (SMF9), compliance oversight (SMF16), money laundering reporting (SMF17), partner (SMF27) and, for some firms, others. That makes SMF3 the function that brings most board-level executives into the regime. The finance director of a Core investment manager, for example, is usually a Senior Manager because they sit on the board, not because of their finance role.
Two consequences follow. First, if a Core firm adds someone to its board, it must apply for SMF3 approval before they take the seat. Second, if a senior executive at a Core firm does not sit on the board, they may not be a Senior Manager at all, but are likely to be within the Certification Regime. As a Core firm grows into the Enhanced tier, some SMF3 holders will need approval for more specific functions instead. Our guide to becoming an Enhanced firm covers that transition.
SMF3 or SMF18?
A question we’re asked often is whether a senior executive should be SMF3 or SMF18, Other Overall Responsibility. The distinction is about the board seat. SMF3 applies to executive directors on the board. SMF18 applies at Enhanced firms to people who have overall responsibility for an activity, business area or management function but are not otherwise approved, whether or not they sit on the board. We go through the decision in detail in SMF3 or SMF18: getting the designation right before you recruit.
| SMF3 Executive Director | SMF18 Other Overall Responsibility | |
|---|---|---|
| Trigger | Sitting on the board as an employee | Overall responsibility for an area at an Enhanced firm |
| Firm types | Core, Enhanced, banks, insurers | Enhanced firms |
| Typical holders | Finance, operations or commercial directors on the board | Heads of business areas below board level |
| Common mistake | Forgetting approval when adding an executive to the board | Leaving a senior business head unapproved |
Scenario: A Core wealth management firm decides to appoint its head of operations to the board. The board resolution is drafted for the next meeting before anyone checks the regulatory position. The company secretary spots that a board seat will make the head of operations an SMF3 and that approval is needed first. The firm delays the appointment, submits a Form A with a Statement of Responsibilities covering operations and outsourcing, updates its responsibilities map and confirms the appointment once approval is granted.
What an SMF3 Is Accountable For
Because SMF3 is defined by the board seat rather than a specific area, the accountability comes from what the firm puts in the Statement of Responsibilities. That makes the SoR particularly important. A vague SoR that says only “executive director” leaves the person’s accountability unclear and is likely to draw questions from the regulator. A good SMF3 Statement of Responsibilities sets out:
- the business areas or functions the person runs, such as finance, operations, sales or technology;
- any Prescribed Responsibilities allocated to them;
- their role on the board and any committees; and
- how their responsibilities fit with those of the other Senior Managers, as shown in the responsibilities map.
Our free Statement of Responsibilities template includes guidance on wording for executive directors.
Approval: What the Regulator Looks For
The regulator assesses SMF3 candidates against the fit and proper test, focusing on the responsibilities in the SoR. An executive director with responsibility for finance will be assessed on their finance and reporting experience; one with responsibility for operations on their operational and outsourcing experience. Because the function is broad, the regulator relies heavily on the SoR to understand what it is approving.
Common issues with SMF3 applications include:
- an SoR that doesn’t match the person’s real role or experience
- a board appointment made, or announced, before approval is granted
- incomplete regulatory references for the last six years; see the six-year rule
- undisclosed directorships or matters that later appear in checks
- an unclear split of responsibilities between the SMF3 and other Senior Managers
Our guide to what goes wrong in Form A submissions covers these in more detail.
Appointing an Executive Director
For firms adding an executive to the board, or recruiting one externally, a few practical points help:
- Decide the designation first. Confirm whether the role will be SMF3, a more specific function or SMF18 before you write the job description.
- Write the SoR alongside the job description. The two documents should describe the same role; see writing an SMF job description.
- Don’t appoint before approval. Board minutes, Companies House filings and announcements should follow approval, not precede it.
- Consider the board as a whole. A new executive director changes the balance of the board. A board skills matrix helps show what they add.
- Plan for the time. Our guide to how long an SMF appointment takes gives realistic timings.
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Frequently Asked Questions
What is SMF3?
SMF3 is the Executive Director function: the Senior Manager Function for employees who sit on the board of a regulated firm.
Does every executive director need SMF3?
Most do, unless they are already approved for a more specific function that covers their role. Check the rules for your firm type before applying.
Can someone join the board before SMF3 approval?
No. The person must be approved before performing the function, which means before taking up the board seat as an executive director.
What is the difference between SMF3 and SMF18?
SMF3 applies because of the board seat. SMF18 applies at Enhanced firms to people with overall responsibility for an area who are not otherwise approved.
Is a non-executive director an SMF3?
No. Non-executive directors are covered by different arrangements: some hold specific functions such as SMF9 to SMF14, and others are subject to the Conduct Rules without being Senior Managers. See our guide to non-executive directors at FCA-regulated firms.
Can you help us recruit an executive director?
Yes. We recruit approvable executive directors for regulated firms and help with the Statement of Responsibilities and approval process.
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, including Exec Capital for board and C-suite appointments. He leads every SMF Capital search personally. View Adrian’s ICAEW profile.
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