Fractional SMF Agreements: What the Contract Should Cover
More and more smaller regulated firms appoint a fractional Senior Manager: an approved compliance officer, MLRO or CFO who works for them for one, two or three days a week, often alongside roles at other firms. Done well, it gives a small firm experienced, approved leadership at a proportionate cost. Done badly, it leaves the firm with an approved person who isn’t available when needed, unclear responsibilities and a contract that doesn’t reflect the regulatory reality. This guide sets out what the agreement with a fractional Senior Manager should cover.
The Regulatory Starting Point
A fractional Senior Manager is a Senior Manager in every regulatory sense. They need the same approval, hold the same Statement of Responsibilities, are subject to the same Conduct Rules and carry the same personal accountability. The regulator will look closely at whether a part-time arrangement gives the firm enough oversight, and the contract is one of the main pieces of evidence that it does.
That has an important consequence: the contract can’t reduce the Senior Manager’s regulatory responsibilities. Whatever the agreement says about hours, fees or liability between the parties, the regulator will judge the Senior Manager against their Statement of Responsibilities. The agreement should make it possible for them to meet those responsibilities, not limit them. Our guides to fractional or full-time compliance officers and when fractional appointments work cover the broader decision.
What the Agreement Should Cover
| Clause | What it should say | Why it matters |
|---|---|---|
| Role and function | The Senior Manager Function, the Statement of Responsibilities and the scope of services | Aligns the contract with the regulatory role |
| Time commitment | Minimum days or hours, and how they flex with the firm’s needs | The regulator will ask whether the time is enough |
| Availability | Response times for urgent matters outside agreed days | Incidents and regulatory contact don’t wait for scheduled days |
| Cover for absence | Arrangements for holidays and illness, and who steps in | The function must be covered; see the 12-week rule |
| Access and information | Access to systems, records, people, MI and the board | Reasonable steps require information |
| Governance | Board and committee attendance, reporting lines and escalation rights | Protects independence and influence |
| Conflicts of interest | Disclosure of other roles and how conflicts will be managed | Fractional SMFs often serve several firms |
| Confidentiality and data | Handling of confidential information and personal data | Particularly important with multiple clients |
| Records | Where records are kept and that they belong to the firm | The firm must be able to evidence oversight |
| Insurance and indemnity | D&O cover, professional indemnity and any company indemnity | Non-employee SMFs may fall outside some policies |
| Fees and expenses | Day rate or retainer, and how extra time is charged | Avoids disputes when workload rises |
| Termination | Notice periods long enough to arrange a replacement, plus handover duties | The firm can’t be left without an approved person |
Time Commitment and Availability
This is the clause that matters most to the regulator. A fixed number of days is a starting point, not a complete answer. The agreement should also cover:
- how the time commitment will be reviewed as the firm grows or its risks change;
- what happens during periods of heavy demand, such as a regulatory visit, a skilled person review or an incident;
- how quickly the Senior Manager will respond to urgent matters on non-working days; and
- how the Senior Manager’s other commitments are managed so they don’t crowd out this one.
Ask the Senior Manager to disclose their other roles and the time each takes. The regulator may ask the same question when it assesses the application, and the answer needs to be credible.
Conflicts of Interest
Fractional Senior Managers often work for several firms, sometimes in the same sector. That is usually manageable, but the agreement should require disclosure of current and new roles, give the firm the right to object to a direct conflict, and set out how confidential information from each firm is kept separate. Where the Senior Manager provides services through a consultancy, the agreement should also cover other people at the consultancy who may have access to the firm’s information.
Scenario: A small investment firm appoints a fractional SMF16/17 for two days a week. Six months later, an FCA data request lands on a Friday, when she is working at another client. Because the agreement requires a same-day response to regulatory contact and gives her remote access to the firm’s systems, she reviews the request that afternoon and agrees a plan with the chief executive. The firm can later show the regulator that its fractional arrangement works when it matters.
Liability, Insurance and Indemnity
Fractional Senior Managers frequently ask to cap their contractual liability, and firms frequently agree. That is a commercial matter between the parties, but both should understand its limits. A contractual cap doesn’t affect the Senior Manager’s regulatory accountability, and the regulator can take action against an individual regardless of what the contract says.
Insurance needs particular care. Many directors’ and officers’ policies are written around directors and employees. A fractional Senior Manager engaged through a consultancy may not be covered unless the policy is extended to include them. Check this before the appointment, and consider professional indemnity cover held by the Senior Manager or their consultancy as well. Take advice from a broker who understands regulated firms.
IR35 and Engagement Structure
Fractional Senior Managers are often engaged through their own limited company. For medium and large clients, the off-payroll working rules (IR35) require the client to assess whether the engagement would be employment if the intermediary weren’t there, and to issue a status determination. A Senior Manager role, with board attendance, personal accountability and integration into the firm’s governance, can point towards employment. Firms should assess each engagement properly, and some choose to engage fractional Senior Managers on a part-time employment contract instead. Take advice on your specific arrangement.
Ending the Arrangement
A firm can’t be left without an approved person for a function that requires one. The termination clause should give a notice period long enough to recruit and obtain approval for a replacement, or at least to put interim cover in place. It should also require a proper handover; see what a good handover pack contains. When the arrangement ends, the firm must notify the regulator using Form C; see the other SMCR forms.
Checklist Before Signing
- The Statement of Responsibilities is agreed and attached or referenced
- The time commitment is realistic for the firm’s size and risks, and reviewable
- Urgent availability and absence cover are defined
- Other roles are disclosed and conflicts addressed
- Access to systems, information, people and the board is guaranteed
- Records belong to the firm and are kept on its systems
- D&O cover extends to the fractional Senior Manager, or alternative cover is in place
- IR35 status has been assessed where the rules apply
- Notice periods allow time to replace the Senior Manager, with handover duties
Fractional and Interim Senior Managers
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Fractional Cover
Part-time approved Senior Managers.
→ Fractional and interim cover
→ Fractional or full-time?
Control Functions
The roles most often fractional.
→ Compliance officer (SMF16)
→ MLRO (SMF17)
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Frequently Asked Questions
Does a fractional Senior Manager need FCA approval?
Yes. A fractional Senior Manager needs the same approval as a full-time one, and carries the same accountability.
Can a contract limit a fractional Senior Manager’s regulatory responsibility?
No. A contract can allocate liability between the parties, but it can’t reduce what the regulator expects of the Senior Manager under their Statement of Responsibilities.
How many days a week does a fractional SMF need?
It depends on the firm’s size, activities and risks. The time must be enough to perform the role properly, and should be reviewed as the firm changes.
Does IR35 apply to fractional Senior Managers?
It can, where the Senior Manager works through their own company for a medium or large client. Assess each engagement and take advice.
Can you find a fractional Senior Manager for us?
Yes. We place fractional compliance officers, MLROs and CFOs with smaller regulated firms, and can advise on the structure of the arrangement.
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, a specialist in fractional and interim finance leadership, and has since built a network of five specialist recruitment practices. He leads every SMF Capital search personally, including fractional SMF appointments. View Adrian’s ICAEW profile.
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Adrian Lawrence FCA is the founder of SMF Capital and a Fellow of the Institute of Chartered Accountants in England and Wales and holds an ICAEW practising certificate in his own name. He holds a BSc from Queen Mary College, University of London, and has over 25 years of experience working with boards, investors and business owners across the UK. He founded SMF Capital to help FCA and PRA-regulated firms appoint the Senior Managers the regulators expect, with the fit and proper assessment built into every search, and personally leads every Senior Manager Function search.
