COO Magazine Q4 2024
The Senior Management Function 24 (SMF24) in asset management is a vital role that encompasses oversight of a firm’s operational infrastructure, regulatory compliance, and control environment.
Will Parry
Head of Research
Armstrong Wolfe
The specific responsibilities of SMF24 vary significantly depending on the size, structure, complexity, and regulatory classification of the firm, particularly whether it is considered a “core” or “enhanced” firm under the UK’s Senior Managers & Certification Regime (SMCR).
Despite these variations, a detailed examination of responses from multiple asset management COOs provides insight into the general challenges and tasks faced by SMF24s across the industry.
1. Operational Oversight and Control Environment
At its core, the SMF24 function is responsible for the internal operations and ensuring the robustness of the control environment within an asset management firm. This broad mandate includes overseeing how operational processes function across the business and ensuring that regulatory obligations under SMCR are met.
The SMF24 is accountable for maintaining clear oversight of key operational areas to ensure compliance with the spirit of the SMCR, which seeks to ensure that all significant operational functions are appropriately allocated to specific senior managers. This includes managing risks related to internal processes, technology, and other infrastructure that supports the firm’s asset management activities. Given the diversity of firms in the industry, the role of SMF24 can differ considerably between institutions, especially depending on their classification as a core or enhanced firm. Enhanced firms, due to their size and complexity, often require a more structured allocation of SMF roles, with the SMF24 function overseeing a more extensive array of operations compared to smaller or less complex core firms.
Moreover, SMF24s are responsible for ensuring there are no gaps in the senior management responsibilities map, meaning that the operational areas under their remit should be clearly defined and not overlap with or be neglected by other senior functions. The SMF24 role provides a crucial link between the board and operational management, ensuring that senior leadership has a direct line of accountability for how the firm’s processes are conducted and how potential risks are mitigated.
2. Valuation Committees and Related Oversight
Valuation processes are a key area of focus for SMF24s, although there is no specific regulatory requirement for them to chair or directly manage valuation committees. Instead, the role of SMF24 often involves oversight of the operations that support valuation functions, ensuring that processes are robust, controls are effective, and valuations are conducted in line with regulatory expectations.
In many firms, the valuation committee is structured as part of the risk management framework, often reporting to or sitting as a sub-committee under the broader Risk Committee. This ensures that valuation practices are closely tied to the firm’s overall risk management procedures. For example, some firms structure their valuation committees as sub-committees of the Group Risk Committee, with the Chief Risk Officer (CRO) or another senior risk manager acting as chair. This is particularly common in larger, globally integrated firms where valuation processes are governed at the group level but need to align with local regulatory standards, including those in the UK.
In such cases, the SMF24’s responsibility is to ensure that the operational aspects of the valuation process — such as data accuracy, reporting, and procedural adherence — are in place. While the valuation committee might be chaired by a senior risk or investments executive, the SMF24 provides oversight to guarantee that the operations supporting the valuations are consistent with regulatory and internal policy requirements. Additionally, in many cases, particularly in global firms, the valuation committee’s policies and methodologies are reviewed at the group level, and inputs from these reviews are incorporated into the UK Risk Committee’s deliberations. This ensures that UK operations align with the firm’s global standards while adhering to local regulatory requirements.
3. Dealing Teams and Front Office Activities
The operational responsibility for dealing teams, another significant area of oversight, often falls under the SMF24’s remit. However, as is common in asset management firms, the day-to-day management of dealing activities typically resides within the front office or investment team. The functional responsibility for these teams may sit with a senior manager more directly involved with trading or investment operations, such as an SMF18 (responsible for front office functions), rather than the SMF24.
This division of labour reflects a practical reality in most firms, where trading and investment decisions are inherently linked to the front office. However, the SMF24 remains accountable for ensuring that the operational processes supporting these activities — such as trade execution, compliance with regulatory reporting, and managing operational risks — are effectively controlled. This separation helps mitigate conflicts of interest by keeping operational oversight distinct from investment decisions, while still ensuring strong accountability for the performance and integrity of dealing activities.
In cases where the SMF24 does not have direct control over dealing teams, they are still required to ensure that appropriate reporting structures are in place and that risks associated with trading activities are properly managed. For example, if a global firm outsources dealing functions to an internal group entity, the SMF24 is responsible for overseeing the due diligence and monitoring of these outsourced services to ensure compliance with FCA guidelines on outsourcing and operational resilience. This responsibility includes conducting regular assessments of the quality of services provided and ensuring that operational risks related to outsourcing are adequately mitigated.
4. Challenges in Global and UK-Specific Governance
One of the significant challenges faced by SMF24s in global asset management firms is the need to adapt the UK-specific SMCR framework to governance models that are not UK-centric. SMCR was designed with the assumption that firms operate primarily within the UK and that their reporting lines and decision-making structures are centred around UK-based executives and boards. However, in many global firms, the UK is just one of many territories, and operational and governance structures are often globally integrated, with key decisions made at a group or regional level rather than in the UK.
This can create tensions or inconsistencies when aligning global governance frameworks with the SMCR’s UK-focused requirements. In response to these challenges, some global firms have had to strengthen UK reporting lines and formalise local accountability to ensure that UK operations comply with SMCR standards. For example, firms may have to adapt their governance models so that UK-based executives, such as the SMF24, have sufficient authority over local operations even if decision-making power resides elsewhere in the global structure. This requires a delicate balance between maintaining global operational cohesion while ensuring compliance with local regulatory obligations.
SMF24s in these global firms must also navigate the complexities of reporting lines that may not be as clear-cut as SMCR presumes. For instance, the valuation and risk functions may be managed at a global level, but the SMF24 remains accountable for ensuring that the UK operations adhere to the local regulatory environment. As a result, they may need to work closely with global counterparts to align processes and reporting structures with UK-specific requirements.
5. Outsourcing and Operational Resilience
Outsourcing is a critical operational function in asset management, and SMF24s are responsible for ensuring that any outsourced activities comply with regulatory guidelines. This includes not only due diligence at the time of outsourcing but also ongoing monitoring and regular assessments of outsourced services to ensure they meet operational standards and regulatory expectations.
In firms where key functions such as dealing or valuations are outsourced to either internal group entities or external providers, the SMF24 is tasked with overseeing these arrangements and ensuring that robust controls are in place to manage risks. FCA guidelines on outsourcing emphasise the importance of operational resilience, meaning that firms must be able to continue their critical operations even in the event of disruptions to outsourced services. SMF24s play a key role in ensuring that contingency plans and resilience measures are adequate, and that outsourced service providers are held to the same standards as internal operations.
In many firms, an Outsourcing Committee is established to manage these relationships, often chaired by the SMF24. This committee is responsible for assessing the performance and compliance of outsourced services, conducting due diligence, and ensuring that any risks are identified and addressed. Regular reviews, often conducted bi-annually, help the SMF24 ensure that outsourced services remain in line with the firm’s operational needs and regulatory requirements.
6. Delegation of Duties
Although SMF24s are ultimately accountable for the operational functions under their remit, they can delegate specific tasks to other senior managers or executives within the firm. For instance, the chairing of valuation committees or oversight of dealing teams may be delegated to a head of operations or another qualified individual within the organisation. However, the SMF24 remains accountable under the SMCR framework, meaning they must ensure that the individual to whom responsibilities are delegated is competent, experienced, and capable of managing the function effectively.
Formal delegation can be a useful tool for SMF24s, particularly in larger or more complex firms where operational functions are too extensive for one individual to manage directly. Delegating responsibilities allows the SMF24 to focus on broader oversight while ensuring that subject matter experts handle the specific operational processes. Nevertheless, the SMF24 must maintain a strong line of communication with those individuals and ensure that appropriate governance structures are in place to monitor their performance.
Conclusion
The role of SMF24 in asset management is multifaceted and highly dependent on the specific context of the firm, particularly its size, structure, and regulatory classification. Despite the diversity of how the role is applied, there are several common themes: ensuring robust operational oversight, managing risks related to valuation and dealing activities, navigating the challenges of global versus UK-specific governance structures, overseeing outsourced services, and delegating responsibilities where appropriate. The SMF24 plays a critical role in ensuring that the operational and control environment of an asset management firm is aligned with regulatory requirements, thereby safeguarding the firm’s overall operational integrity and resilience.