SMF3 vs SMF1: Executive Director vs CEO Under SMCR

SMF3 vs SMF1: Executive Director vs CEO Under SMCR

SMF1 and SMF3 are two of the most senior controlled functions under the Senior Managers and Certification Regime, and the difference between them is frequently misunderstood. Both are held by senior executives; both carry personal accountability. But they are not the same, and getting the distinction right matters for how a firm allocates responsibility. This article explains the two functions and how they relate.

The two functions defined

SMF1 is the Chief Executive function — held by the person with responsibility, under the immediate authority of the governing body, for the conduct of the whole of the firm’s business. There is normally one SMF1: the chief executive. SMF3 is the Executive Director function — held by a director who is an executive of the firm but who is not the chief executive. A firm may have several SMF3 holders, one for each executive director on the board.

The distinction, in essence: SMF1 is the single individual running the whole firm; SMF3 holders are the other executive directors who sit on the board and carry executive responsibility for their areas without being the chief executive.

What each carries

Both functions are senior management functions, so both require FCA pre-approval, a Statement of Responsibilities, and accountability under the Conduct Rules and the Duty of Responsibility. The difference is the breadth of what they own. The SMF1 holder’s Statement of Responsibilities reflects overall responsibility for the conduct of the firm’s business — the widest accountability any executive carries. An SMF3 holder’s statement reflects their specific executive remit as a director, which is significant but narrower than the chief executive’s whole-firm responsibility.

How they sit against the other senior functions

It helps to place them in the wider SMF structure. Above the executive sit the governance functions — the Chair (SMF9) and the various committee chairs — which are non-executive. Alongside SMF1 and SMF3 sit the specific executive functions such as the Chief Finance function (SMF2), the Chief Risk function (SMF4) and the Compliance Oversight function (SMF16). An individual may hold more than one function — a finance director on the board might hold both SMF2 and SMF3, for instance — and the Statement of Responsibilities is where the firm sets out exactly who owns what.

A common point of confusion is the relationship between SMF3 and the specific-responsibility SMFs. Being an executive director (SMF3) is about board membership and executive status; holding SMF2 or SMF4 is about owning a specific function. The two can coincide in one person but describe different things.

Which functions a firm needs

Not every firm requires the same set. The applicability of particular SMFs depends on the firm’s SM&CR category — Limited Scope, Core or Enhanced — and its permissions and structure. SMF1 is required where a firm has a chief executive performing that role. SMF3 applies to executive directors. Smaller or simpler firms carry fewer functions; Enhanced firms carry the fullest set. Getting the firm’s required functions right, and allocating them cleanly, is a core part of SM&CR compliance.

Why the distinction matters in practice

The allocation matters because accountability follows it. If responsibility for an area is genuinely the chief executive’s, it should sit in the SMF1 statement; if it belongs to a specific executive director, it should sit with the relevant SMF3 (or specific-function) holder. Blurring this — leaving responsibilities unallocated, or allocating them to the wrong level — is precisely what the regime is designed to prevent, and it is what a supervisor examines when something goes wrong. Clear Statements of Responsibilities that reflect who genuinely owns what are the foundation of a defensible SM&CR framework.

FD Capital recruits chief executives, executive directors and the full range of SM&CR function holders into FCA-regulated firms, and works with firms on getting senior appointments and their responsibilities right.

Holding multiple functions: how it works in practice

In real firms, especially smaller ones, individuals frequently hold more than one senior management function, and understanding how that works clears up much of the confusion around SMF1 and SMF3. A managing director who is also the most senior executive might hold SMF1. A finance director on the board holds SMF3 as an executive director and SMF2 as the Chief Finance function. The functions describe different dimensions of the person’s role — board status, executive seniority, and specific functional responsibility — and the Statement of Responsibilities ties them together into a clear picture of accountability.

What matters is that every significant responsibility is allocated to someone, and that the allocation reflects reality. The regime is unforgiving of responsibilities that sit in the gaps between functions.

The chief executive’s distinctive accountability

It is worth dwelling on what makes SMF1 different, because it is the function that carries the widest personal accountability in the firm. The chief executive is responsible, under the governing body’s authority, for the conduct of the whole business. That breadth means the SMF1 holder cannot fully delegate away accountability — they retain a top-level responsibility for the firm’s overall conduct even where specific areas are owned by others. This is why the chief executive’s Statement of Responsibilities is scrutinised closely, and why the role carries the heaviest personal exposure under the Duty of Responsibility.

Getting the allocation right

For firms, the practical task is allocating the required functions cleanly and documenting them honestly. That means identifying which SMFs the firm’s category and permissions require, appointing fit-and-proper individuals to each, drafting Statements of Responsibilities that reflect who genuinely owns what, and keeping them current as the firm and its people change. Done well, this is the backbone of a defensible governance framework; done carelessly, it is the first thing that unravels when the regulator examines a problem.

Firm categories and which functions apply

The SM&CR category a firm falls into shapes which senior management functions it must have, and understanding this is essential to allocating them correctly. Limited Scope firms carry the fewest required functions; Core firms carry a standard set; Enhanced firms — the largest and most complex — carry the fullest range including additional functions and prescribed responsibilities. A firm needs to know its category, identify the functions that category requires, and ensure each is held by an approved, fit-and-proper individual.

SMF1 and SMF3 sit within this structure as the core executive functions — the chief executive and the executive directors — alongside the specific-responsibility functions the firm’s activities require. Mapping all of this correctly is foundational SM&CR compliance, and errors in it are a common finding.

What a strong Statement of Responsibilities looks like

Because so much turns on the Statement of Responsibilities, it is worth knowing what a good one does. It sets out clearly what the individual is responsible for, in language specific enough to be meaningful rather than boilerplate. It leaves no significant responsibility unallocated and none double-allocated without clear rationale. It reflects what the person actually does rather than an idealised job description. And it is kept current as roles change. For SMF1 in particular, it captures the whole-firm responsibility the chief executive carries; for each SMF3, it captures that director’s specific executive remit.

Why clean allocation protects the firm and the individual

Clear allocation of SMF1, SMF3 and the specific functions is not bureaucratic housekeeping — it protects both the firm and the individuals. For the firm, it means that when something goes wrong, responsibility is traceable and the governance framework holds up to scrutiny. For individuals, it means their accountability is defined and bounded: a senior manager is responsible for their allocated area, not for everything, provided the allocation is clear and they took reasonable steps within it. Vague or overlapping Statements of Responsibilities expose everyone, because they leave it unclear who was accountable when a failure occurs. Precision in the allocation is in everyone’s interest.

This article is general information about UK financial services regulation and recruitment practice. It is not legal or regulatory advice. Firms and individuals should take their own professional advice on their specific circumstances.