How the FCA views fractional SMF 16/17

The FCA's published guidance on heads of compliance and MLROs addresses fractional appointments directly: smaller firms may propose that an individual carries out the SMF16 or SMF17 role part-time, and the regulator has said it will sometimes accept this. That settles whether a fractional model is legitimate. It does not settle how much one person can take on, or how the arrangement must be structured — and that is where the FCA's underlying expectation matters.

The FCA's wording is clear, but weighing it is highly subjective: a part-time SMF holder's commitment to the role "must be proportionate and sufficient." Proportionate means scaled to the size, complexity and risk profile of the firm. Sufficient means enough, in substance rather than on paper, to discharge the duty of responsibility that comes with the role. The right qualifications and experience are not enough on their own — the regulator wants evidence that the time actually committed matches what the firm's risk profile demands.

What the FCA is actually testing

None of this means a fractional SMF16 or SMF17 is treated as a lesser arrangement. It means the FCA expects the firm, and the individual, to be able to justify the time commitment against the specific risk the firm presents — not against a generic industry norm. A small, single-strategy advisory firm with a handful of professional clients carries a very different risk profile to a multi-strategy fund with leverage, multiple prime broker relationships and a growing investor base. The same fractional CCO might be entirely sufficient for the first and entirely insufficient for the second.

Any individual at a firm who is accountable for a compliance or MLRO function should have sufficient knowledge and experience to make relevant compliance decisions for the business, know when to seek advice, and know how to implement that advice. External support that isn't backed by that kind of genuine accountability is unlikely to satisfy the FCA on its own.

Employee or external consultant: the FCA treats these very differently

There is a further distinction the FCA's own guidance is explicit about: heads of compliance and MLROs are usually senior leaders within the business and often company directors. Applicants who are not senior leaders within the firm — including external compliance consultants — are often unsuccessful, because, however experienced, they may lack the incentives or authority required to be effective in the role.

An in-house employee who holds SMF 16/17 alongside another internal role — a COO, an executive director, a general counsel — starts from a position of structural credibility: they sit inside the firm's governance, and their incentives align with the firm's standing rather than a fee arrangement. The FCA's residual concern is conflicts of interest, particularly where that person also generates revenue or faces clients.

An external consultant proposing to hold the badge itself — rather than supporting someone else who holds it — starts from a harder position. The FCA's concern is authority and durable presence, not competence. A consultant spread across several unrelated firms can struggle to demonstrate the embedded, day-to-day authority the regulator is looking for.

What this means in practice: three engagement structures

This distinction is why a genuinely fractional CCO arrangement tends to take one of a small number of structurally different forms, and why they should not be confused with each other.

Where James Lane holds the SMF 16/17 badge directly — named on the firm's FCA register as the compliance oversight or MLRO function holder — the firm needs that arrangement structured as an employment relationship, not a services contract. This is not a stylistic preference; it follows directly from the FCA's own stated expectation that the person holding the badge is a senior leader inside the business, not an outsourced provider. In practice this typically means a part-time employment contract, sometimes alongside a wider COO-type or general counsel role, so the individual is genuinely inside the firm's governance structure rather than attached to it by a services agreement.

Where the firm already has, or appoints, its own internal senior leader to hold SMF 16/17 — a director, a COO, an existing compliance hire — Reg Advantage can operate on a standard contractual, services basis: building the compliance, risk and legal framework, drafting policy, running monitoring and testing, and providing independent challenge to the person who carries the formal accountability. This is the hybrid structure the FCA's guidance implicitly favours: an internally accountable senior leader who is properly supported by specialist external resource, rather than the external resource carrying the badge itself.

A third structure combines both, and can be the most effective answer for an emerging firm. James Lane holds the SMF 16/17 badge himself, as a fractional employee, while the firm separately contracts with Reg Advantage for the broader resource needed to build and operate the function around him — policy drafting, monitoring, surveillance, reporting infrastructure, Reg Advantage's own tooling, and the wider Build, Operate, Transfer work. James carries the personal regulatory accountability the FCA expects; Reg Advantage's external resource provides for scaling the function itself.

This structure is usually transitional. A common scenario is a founder or COO holding the SMF 16/17 badge alongside their main role — a multi-hatting arrangement that institutional allocators increasingly flag at the operational due diligence stage, sometimes stalling a capital raise. James stepping in as the named SMF holder removes that conflict immediately. Because James's own capacity is deliberately limited, the firm and Reg Advantage typically use this period to identify and support the hire of a dedicated SMF holder, with the badge handed over once that person is in place and ready.

Reg Advantage works across all three structures, and the right one depends on where a firm is in its own growth. A very early-stage spin-out, or a firm facing an ODD-driven conflict, may need James to take the badge directly for a period. A firm that already has, or is ready to appoint, its own accountable individual is usually better served by the purely contractual model — building and operating the framework around that person, with the badge held internally from the outset.

Why capacity is limited

The number of SMF 16/17 mandates one person can responsibly hold is not fixed — it depends on the size, complexity and risk of each firm on their roster, considered together. A handful of low-complexity advisory firms might leave real capacity to spare; one fast-growing multi-strategy fund approaching a launch can absorb most of it alone. This is why Reg Advantage is deliberately selective about how many SMF 16/17 mandates James holds directly, reassessing the right number firm by firm rather than treating it as a volume play. As Reg Advantage grows its team, that capacity will expand — but only in step with the same discipline.