SMF3 Executive Director Function: A Guide

The SMF3 Executive Director function applies to directors of enhanced SMCR firms who perform executive roles that are not covered by another prescribed Senior Manager Function — bringing those individuals within the personal accountability framework of the Senior Managers and Certification Regime.

Under the Senior Managers and Certification Regime, every individual who performs a senior management function at an FCA-regulated firm must be individually approved by the FCA. The SMF3 Executive Director function is a broadly defined function that operates as a catch-all for executive directors of enhanced firms whose specific responsibilities are not already covered by named functions such as SMF1 (CEO), SMF2 (CFO), SMF4 (CRO) or SMF16 (Compliance Oversight). Its breadth makes it one of the most commonly designated functions at complex firms with large boards.

What Is the SMF3 Executive Director Function?

The SMF3 function is defined in SUP 10C as the function of acting in the capacity of an executive director — other than a director who performs one of the other prescribed senior manager functions. A person performs the SMF3 function if they are an executive director of an enhanced SMCR firm and their role gives them significant influence over the firm’s management or policies, even if their specific responsibilities do not map to a named function.

The FCA’s approach to SMF3 allocation is functional rather than nominal — it is determined by what the individual actually does, not their job title. A director with the title “Chief Commercial Officer” who has executive authority over the firm’s product strategy and distribution network would typically hold SMF3. A director titled “Managing Director” of a business division who has executive authority over that division’s operations would hold SMF3. In each case the function attaches to the executive authority, not the label.

Which Firms Must Designate SMF3?

The SMF3 function applies to enhanced SMCR firms — the largest and most complex FCA-regulated businesses. Enhanced firms include: UK banks, building societies and credit unions (dual-regulated); insurers above certain thresholds; and solo-regulated FCA firms above specific size thresholds based on assets under management, revenue or other metrics specified in the SMCR rules. Core SMCR firms — the majority of FCA-regulated businesses — are not required to designate SMF3 holders, though they may voluntarily do so.

At enhanced firms, every executive director who is not covered by another prescribed SMF must be approved as an SMF3 holder. This means that as the firm’s board composition changes — through new appointments, departures, or changes to executive responsibilities — the SMF3 designations must be reviewed and updated to ensure they remain accurate.

SMF3 vs SMF1: Understanding the Distinction

The most important distinction in practice is between SMF3 (Executive Director) and SMF1 (CEO or equivalent). The SMF1 function attaches to the individual with overall responsibility for the firm’s management — the person accountable to the board for the firm’s performance as a whole. The SMF3 function attaches to other executive directors who exercise significant executive authority within defined areas of the business but do not hold the overall management accountability that SMF1 requires.

In a typical large financial services group, the CEO holds SMF1 and the CFO holds SMF2. Other executive directors — Chief Operating Officer, Chief Commercial Officer, Chief Technology Officer, Chief People Officer, Managing Director of specific divisions — hold SMF3, with their Statements of Responsibilities defining the specific activities for which each is accountable. At very complex firms a single executive may hold both SMF3 and another named function where their responsibilities span both — though this is subject to the FCA’s general guidance on how functions should be allocated.

Statements of Responsibilities for SMF3

Every SMF3 holder must have a Statement of Responsibilities (SoR) — a document that sets out clearly what they are responsible and accountable for at the firm. The SoR is central to the SMCR’s accountability framework: in any FCA investigation into a failure at the firm, the SoRs of relevant senior managers will be examined to determine who was responsible for the area where the failure occurred.

An adequate SoR for an SMF3 holder must: accurately reflect the individual’s actual responsibilities at the point it is prepared; be specific enough that the FCA can identify what the individual is accountable for without ambiguity; and be updated promptly whenever the individual’s responsibilities change. SoRs that are drafted in general terms — describing high-level oversight of broad functions rather than specific accountabilities — do not meet the FCA’s expectations and expose the firm and the individual to risk if a failure occurs in an area covered only by the generalised language.

FCA Approval Process for SMF3

An individual proposed as an SMF3 holder must be approved by the FCA before they begin performing the function. The approval application — submitted through the FCA’s Connect system — requires the firm to submit: a completed Form A, including the individual’s personal history, regulatory history and details of any matters relevant to fitness and propriety; the individual’s proposed Statement of Responsibilities; and any supporting documentation the FCA requests.

The FCA’s assessment of an SMF3 application focuses on the individual’s fitness and propriety — their honesty and integrity, their competence and capability for the proposed role, and their financial soundness. The FCA will also review the proposed SoR to confirm it is complete and accurate. Applications that contain incomplete disclosure, particularly regarding adverse regulatory or financial history, are treated as a significant concern and can result in the application being refused or delayed pending further enquiries.

For executive directors joining from other regulated firms, the FCA will typically request a regulatory reference from the previous employer covering a five-year look-back period. Firms seeking to appoint an SMF3 holder should initiate the regulatory reference process at the earliest opportunity — delays in obtaining references are a frequent cause of SMF approval delays that in turn delay operational changes at the firm.

Ongoing Obligations of SMF3 Holders

Once approved, an SMF3 holder is subject to the SMCR’s ongoing obligations. They must comply with the Senior Manager Conduct Rules in COCON — the rules that require them to act with integrity, due skill and care, openness with regulators, and proper control over their business area. They must take reasonable steps to ensure the business for which they are responsible complies with applicable regulatory requirements. And they must disclose to the FCA any information of which they are aware that could affect their fitness and propriety.

The “reasonable steps” obligation is the most demanding in practice. An SMF3 holder is not personally liable for every regulatory failure in their area, but they must be able to demonstrate that they took reasonable steps to prevent failures — by putting adequate controls in place, by ensuring the right information was reported to them, and by taking appropriate action when concerns were identified. An SMF3 holder who was not aware of a failure because they did not have adequate management information is not automatically protected: if the FCA concludes that an SMF3 holder should have had adequate information but did not, the absence of awareness is itself a failure of the reasonable steps obligation.

SMF3 Handover and Transition

When an SMF3 holder leaves their role, the firm must ensure an adequate handover. The FCA expects firms to have handover procedures that ensure the incoming SMF3 holder understands the responsibilities they are assuming, the status of any live regulatory matters, and any known risks or issues in the area they are taking on. Handover documentation should be retained as evidence of the firm’s compliance with SMCR handover obligations.

Key References

• FCA Handbook SUP 10C — Senior Managers Regime for FCA-authorised firms
• FCA — Senior Managers and Certification Regime
• FSMA 2000, Section 59 — Approval for particular arrangements