Hiring an SMF2-Approved CFO: What the Chief Finance Function Really Demands

When a regulated firm hires a chief financial officer, it is not only appointing its most senior finance leader. It is appointing the holder of SMF2 — the chief finance function under the Senior Managers and Certification Regime — a governing Senior Management Function that carries personal regulatory accountability for the firm’s financial affairs. That distinction changes who the board can appoint, how the candidate is assessed, and what the firm has to demonstrate to the regulator before the appointment is complete.

This article explains what the SMF2 function is, why hiring an approvable CFO is a different exercise from hiring a finance director in an unregulated business, and how a board should approach the search. Where a specialist search is the right route, Exec Capital runs CFO recruitment for regulated firms as retained, research-led mandates led personally by the founder — himself a chartered accountant and former listed-company Finance Director.

What SMF2 Is

SMF2 is the chief finance function — a governing Senior Management Function held by the individual with responsibility for managing the financial resources of the firm and, in most cases, for the firm’s financial reporting and oversight of its financial affairs. It is one of the core governing functions the FCA and PRA expect an authorised firm to allocate, and it is ordinarily held by the chief financial officer or finance director.

Like every Senior Management Function, SMF2 is held by an approved person. The holder must be assessed as fit and proper, holds a Statement of Responsibilities setting out what they are accountable for, and is subject to the Conduct Rules and the Duty of Responsibility. In practice, the SMF2 is accountable not merely for producing accurate numbers but for the integrity of the firm’s financial management — capital and liquidity monitoring, regulatory financial reporting, and the financial information the board and the regulator rely on.

SMF Capital sets out the function in depth in its guide to the SMF2 chief finance function, and runs dedicated SMF2 CFO recruitment for regulated firms; the complete SMF designations guide shows how the chief finance function sits among the other governing and required functions.

Why an Approvable CFO Is a Narrower Brief

Regulatory financial experience, not just commercial finance

A strong commercial CFO — someone who has driven growth, led fundraising, or run finance through a scale-up — is not automatically the right SMF2. A regulated firm needs a finance leader who understands prudential requirements: capital adequacy, liquidity, the regulatory returns the firm must file, and the FCA or PRA’s expectations of the finance function. The best candidate for an authorised firm is frequently someone whose record is in regulated finance, even if their commercial scope is narrower than a candidate from an unregulated sector.

Fitness and propriety is part of the hire

Before an SMF2 can be appointed, the firm must assess the individual as fit and proper and be able to evidence that assessment: honesty and integrity, competence and capability, and financial soundness. The fit and proper test is not a box-ticking exercise at the end of the process; it shapes who can realistically be shortlisted. A search that ignores it risks presenting candidates who impress the board but cannot ultimately be approved.

The CFO often holds more than one function

At smaller authorised firms the chief finance function is frequently combined with other responsibilities, and the SMF2 may also be a board director. Where the finance leader sits on the board as an executive director (SMF3), the appointment carries both the finance function’s accountability and the governing responsibilities of a board role. The firm needs to be clear which functions the individual will hold, because that determines the scope of their Statement of Responsibilities and the basis on which they are assessed.

What the Board Is Really Hiring

A regulated CFO appointment asks for two things at once. The first is finance leadership: command of the firm’s numbers, the judgement to advise the board on capital and strategy, and the ability to build and run a finance function. The second is the regulatory standing to hold SMF2: an understanding of the prudential framework, the credibility to be assessed as fit and proper, and the temperament to own personal accountability for the firm’s financial affairs. A board that assesses only the first will struggle to get its chosen candidate approved.

• A finance leadership record appropriate to the firm’s scale, business model and regulatory status;
• Command of the prudential requirements the firm is subject to — capital, liquidity and regulatory reporting;
• The regulatory credibility to be assessed as fit and proper for a governing function;
• A clear understanding of where the chief finance function sits among the firm’s other Senior Management Functions;
• The judgement and temperament to discharge the Duty of Responsibility for the firm’s financial affairs.

At most authorised firms the SMF2 works closely with the chief executive (SMF1) and the compliance and risk functions. A CFO who understands how those functions interlock — who can give the board assurance on the firm’s financial position without encroaching on the compliance or risk functions’ accountabilities — is worth considerably more to a regulated board than a technically strong finance leader with no feel for the regulatory architecture.

How to Run the Search

A regulated CFO search is best run as a structured, research-led and confidential exercise. The strongest finance leaders are usually in post, and the pool of candidates who combine finance leadership with regulatory standing is smaller than the pool of good CFOs in general. The brief should be explicit about the firm’s regulatory status and the scope of the SMF2 role from the outset, so candidates are assessed against the regulated dimension rather than screened for it afterwards.

Exec Capital runs these as retained searches. Briefing covers the firm’s prudential requirements and the scope of the chief finance function as well as the commercial finance brief; research maps candidates with both the finance leadership record and the regulatory experience the function demands; approach and assessment test both; and the shortlist carries assessment commentary that speaks to fitness and propriety. We support the firm through interviews, offer, the Statement of Responsibilities, and the regulatory approval process.

Where the firm is building out its regulated leadership team — appointing a chief finance function alongside compliance, risk or an executive director role — we coordinate the searches so the functions fit together. Related mandates include executive director (SMF3) recruitment, compliance oversight (SMF16) and, where the firm is appointing a finance leader on a fractional or interim basis, regulated finance leadership on a part-time footing.

Frequently Asked Questions

Does every regulated firm need an SMF2?

The chief finance function is one of the governing functions an authorised firm allocates under SM&CR. Whether it is a required, standalone function depends on the firm’s classification and governance structure — at smaller firms it may be combined with other functions held by the same individual. The firm’s regulatory arrangements confirm how the function is allocated.

Can a CFO from an unregulated business hold SMF2?

Yes, provided the firm can demonstrate the individual is fit and proper for the function. A candidate without prior regulated experience can be appointed, but the firm and its advisers need to be confident that the individual understands the prudential framework and can discharge the function’s accountability. The assessment and the regulatory application need to reflect that honestly.

What is the difference between an SMF2 CFO and a fractional FD?

The function, not the hours. A fractional or part-time finance leader can hold SMF2 where the arrangement gives them genuine responsibility for the firm’s financial affairs and the regulator is satisfied they can discharge it. What the firm cannot do is hold a named individual out as its chief finance function while the real responsibility sits elsewhere.

Sources and Further Reading

• FCA — Senior Managers and Certification Regime
• FCA Handbook — SUP 10C (FCA senior management functions)
• Bank of England / PRA — strengthening individual accountability