SMF3 Executive Director Function: Who Needs It, Core Firms and the 2027 Changes

SMF3, the Executive Director function, applies to every director of a UK regulated company who is not a non-executive director. It applies at Core firms and Enhanced firms, and the FCA alone approves it at banks and insurers. Each executive director must be approved before taking up the role. The FCA's CP26/37 proposes that SMF3 stays an approved function.

What SMF3 covers

SUP 10C.5.1R defines the executive director function as acting in the capacity of a director, other than a non-executive director, of the firm. In plain words: if you sit on the board of a UK SMCR company and you are not a non-executive, you perform SMF3, whatever your job title.

Three points follow from the rule:

• It applies to companies, not partnerships. SUP 10C.5.1R(4) says SMF3 does not apply to a UK firm that is a partnership or a limited liability partnership. Their members use SMF27, the Partner function.
• At a UK branch of a non-EEA firm, SMF3 covers a director of the overseas firm who manages aspects of the branch's activities, or who sits (other than as a non-executive) on the branch's governing body.
• The label does not decide it. Section 417 of FSMA defines a director as including anyone who occupies the position of a director by whatever name called, and anyone whose instructions the directors are accustomed to follow.

SYSC 25.4.11G describes SMF3 as a function defined generally, which several people can perform at once. Example: a Core consumer credit lender has a board of five: a chief executive, a finance director, a sales director and two non-executives, one of whom chairs. The three executives each hold SMF3. The chief executive also holds SMF1, and the chair holds SMF9. The other non-executive needs no approval.

Which firms need an SMF3

The rule that matters most: SMF3 applies at Core firms. The table for Core firms in SUP 10C Annex 1 marks the executive director function as applying to UK Core firms, and the FCA's guide for solo-regulated firms lists it among the six Core SMFs. Some published guides state that Core firms do not need SMF3 holders. The Handbook says otherwise: a Core company with executive directors must have each of them approved as SMF3.

At dual-regulated firms, the FCA alone approves SMF3. Under the overlap rule in SUP 10C.9, a director who is already approved by the PRA for a PRA function, such as chief finance officer, does not need separate FCA approval for SMF3 if the firm told the PRA they would also act as a director. If that person later gives up the PRA function but stays on the board, FCA approval for SMF3 is then needed.

Our Senior Management Functions guide shows where SMF3 sits among every other SMF.

What the SMF3 holder is personally accountable for

Statement of Responsibilities. Each executive director has a Statement of Responsibilities, the document held by the FCA that lists what this person answers for. "Member of the board" is not enough. The statement should name the business areas or functions the director manages, such as sales, operations or finance, so it is clear what the director is accountable for beyond their share in board decisions.

Prescribed responsibilities. These are duties the rules say must be given to a named senior manager. At a Core firm, SYSC 24 Annex 2 points (a), (b) and (b-1) towards the chief executive, so an executive director holds them mainly where there is no chief executive or where they are the most senior person for that area. An executive director can hold (d), the firm's financial crime policies, or (z), CASS compliance, where they are the most senior person responsible for that area. Separately, the firm's responsibility for insurance distribution or mortgage credit intermediation under MIPRU 2.2.1R may be given to an SMF3, and the firm must notify the FCA of that allocation.

Senior Manager Conduct Rules. Every SMF3 holder must take reasonable steps to ensure the business they are responsible for is controlled effectively (SC1) and complies with the regulatory system (SC2), that delegation is appropriate and overseen (SC3), and must disclose to the regulator anything it would reasonably expect to know (SC4). The six Individual Conduct Rules in COCON 2.1 also apply.

The Duty of Responsibility. Under section 66A(5) of FSMA, if the firm breaches a requirement in an area an executive director is responsible for, and they did not take the steps a person in their position could reasonably be expected to take, the FCA can act against them personally. The question is always what the director's own area was, which is why a precise Statement of Responsibilities protects the holder as much as the firm.

Reasonable steps in practice

DEPP 6.2 lists what the FCA considers. For an executive director two items stand out: whether they took reasonable steps where they were part of a collective board decision, and whether they understood the activities in their area. The evidence usually looks like this.

A director who simply followed the board will find it hard to show reasonable steps. Records of your own challenge and your own oversight are what count.

The first 90 days in the role

• Agree your Statement of Responsibilities with the board, naming the areas you manage.
• Get a written handover from your predecessor or, for a new role, a briefing on open issues in your area.
• Read the last year of board minutes, risk reports, compliance monitoring and complaint data for your area.
• Set up the management information you need and how often you will review it.
• Agree reporting lines with your direct reports and record any delegation.
• Ask compliance for any open regulatory issues affecting your area.
• Start keeping notes of your contributions to board decisions from your first meeting.

Applying for approval

The firm applies on Form A through Connect. A director who has not held an approved role in the last six months uses the long form, which carries a category 1 fee when made as a standalone application. An approved person who gives up one function at the firm to take on another uses Form E. The application includes the Statement of Responsibilities, ten years of employment history and directorships, a competence and capacity assessment, a skills gap analysis and learning plan, regulatory references from every employer in the last six years under SYSC 22, and a criminal records check no more than six months old. Enhanced and dual-regulated firms add the management responsibilities map and a handover summary.

The firm must first assess the candidate as fit and proper against FIT: honesty, integrity and reputation; competence and capability; and financial soundness. The FCA pays close attention to time commitments and other directorships, so list every directorship from the last ten years and explain how conflicts will be managed. It may interview the candidate and will say in advance what it wants to discuss. The FCA's guidance on preparing an SMF application covers the checks expected.

Under section 61 of FSMA, the regulator must decide within three months of receiving a complete application, and the clock pauses while it waits for further information. The FCA has committed to two months. Acting as a director before approval exposes the person to a penalty under section 63A. The temporary cover rule in SUP 10C.3A lets someone cover an absent executive director for up to 12 weeks, and if a complete application is submitted in that time they can continue until the decision.

What CP26/37 would change for SMF3

SMF3 stays an approved function at every firm. The FCA proposes no change to SMF roles at Core and Limited Scope firms, and SMF3 is not on the list of functions to be notified at Enhanced and dual-regulated firms. What changes around it:

• Single senior manager firms. Where one person performs every SMF, no Statement of Responsibilities would be needed. The FCA's own example is one individual performing SMF3, SMF16 and SMF17. If a second person is later appointed to any SMF, both need statements.
• Statements of Responsibilities. Changes would no longer be filed. Firms keep them current, retain old versions for six years and provide them on request.
• Prescribed responsibilities. Only (a), (d), (z) and, for Enhanced firms, (j-3) would remain, so directors holding (b) or (b-1) would lose them.
• SMF18 removal. At Enhanced firms, areas run by SMF18 holders would be reallocated to other SMFs, which may mean more responsibility for executive directors.
• Temporary cover. Cover for an absent executive director would run for 18 weeks, with a "reasonable use" test replacing "reasonably unforeseen".

The consultation closes on 22 January 2027 and final rules are expected in the first half of 2027. Our article on SM&CR Phase 2 covers the full package.

Holding SMF3 with other functions

The definition means an executive director holds SMF3 alongside any other SMF they perform, unless the PRA overlap rule applies.

• SMF3 and SMF1. A chief executive who sits on the board holds both. See our guide to SMF1 Chief Executive.
• SMF3 and SMF16 or SMF17. Common at smaller firms. The FCA's guide gives the example of an executive director who also holds SMF17. Our guides to SMF16 Compliance Oversight and SMF17 MLRO explain those roles.
• SMF3 and SMF2, SMF4 or SMF24. At an Enhanced solo-regulated firm, a finance, risk or operations director on the board performs both their own function and SMF3.

The firm applies for each function, on one form if made together, and the person has one Statement of Responsibilities covering all of them. The FCA will test capacity, and our guide to fitness and propriety explains the annual reassessment that follows.

How we support SMF3 holders

We help executive directors show what they answer for, so that board membership and personal accountability line up.

• One-to-one Senior Manager training built on the director's own Statement of Responsibilities
• Drafting and review of the Statement of Responsibilities
• The Form A application and the fitness and propriety file
• FCA interview preparation
• Handover arrangements when directors join, leave or change roles

Our wider SM&CR support covers board structure, prescribed responsibility allocation and the move to the 2027 rules.