Asset Management Board Appointments: SMCR

Asset Management Board Appointments: SMCR, FCA Expectations and the Talent Pool

Asset management is one of the most diverse segments of the FCA-regulated financial services landscape. The population of firms under the FCA’s asset management supervisory umbrella ranges from global investment managers with hundreds of billions under management to boutique single-strategy funds with a handful of employees. Across this range, the governance requirements under SMCR are broadly consistent, but the practical implications for board appointments vary significantly depending on firm type, regulatory category, and the complexity of the investment strategy being managed.

Exec Capital places executives and non-executive directors at asset management firms including discretionary fund managers, investment trusts, multi-asset managers, private equity and venture capital firms, hedge funds and alternative investment managers. This guide addresses what boards and nomination committees at asset management firms need to consider when approaching a senior appointment.

The Regulatory Framework for Asset Management Firms

Most UK asset management firms are regulated under the COLL Sourcebook (for authorised funds), the AIFMD framework (for alternative investment fund managers) or MIFID permissions (for discretionary portfolio managers and advisory firms). The SMCR requirements apply across these firm types with variations in which specific SMF designations are required and which conduct rules apply.

MIFIDPRU, which came into effect in January 2022, introduced a new prudential regime for investment firms that was previously subject to the Capital Requirements Regulation. Under MIFIDPRU, investment firms are classified into tiers (SNIs and non-SNIs) and the remuneration and governance requirements vary by tier. The most significant MIFIDPRU implications for board appointments are the MIFIDPRU Remuneration Code requirements, which affect how material risk takers — including senior management — are compensated.

What the FCA Expects from Asset Management Boards

The FCA’s supervisory approach to asset management governance has intensified significantly over the past decade, driven by concerns about conflicts of interest, the quality of governance at smaller authorised firms, and the treatment of retail investors under Consumer Duty. The regulator expects asset management boards to provide genuine oversight of investment performance and risk, not to act as a rubber stamp for management decisions that have already been made elsewhere in the business.

For the CEO and CIO at an asset management firm, the FCA pays close attention to how they manage potential conflicts between the firm’s commercial interests and the interests of fund investors. The investment management landscape has a long history of cases where management fees, product design and distribution arrangements have created conflicts that were not adequately managed by the board’s oversight function. Boards that can demonstrate genuine independent oversight of these conflicts — with NEDs who have the investment knowledge to identify them and the authority to challenge management when they arise — are better positioned in supervisory interactions than those where the board’s investment expertise is limited.

The Talent Pool for Asset Management Board Roles

The talent pool for asset management executive appointments is structured differently from other financial services segments. Investment knowledge is a threshold requirement for CEO, CIO and CRO roles at investment managers — candidates without a genuine understanding of the firm’s investment strategy and the risk framework around it will struggle to earn the trust of the investment team or to engage credibly with the FCA. This narrows the candidate pool significantly for investment-focused roles and requires a search approach that prioritises sector depth over broad financial services generalism.

For non-executive director appointments, the asset management governance market faces a structural supply challenge. The number of experienced independent NEDs who combine genuine investment expertise with the governance capability and independence standards the FCA expects is limited relative to the number of investment firms seeking to add this profile to their boards. The competition for strong asset management NEDs — particularly at the smaller end of the market where the appointment may be the NED’s only regulated firm mandate — is intense, and firms that move slowly through the appointment process frequently lose their preferred candidates to competitors.

Investment Trust Board Appointments

Investment trust boards have specific governance characteristics that distinguish them from operating company boards. Directors of investment trust companies are typically entirely non-executive — the investment manager is an external party operating under a management agreement rather than an employee of the trust. This means that the full board of an investment trust must provide genuine investment oversight without the institutional support that an internal executive team provides, and the NED profile for investment trust appointments is correspondingly more demanding than for operating company NEDs.

The FCA has been increasingly focused on the governance quality of investment trust boards, particularly in relation to cost transparency, the management of performance fee structures, and the oversight of investment manager performance. Investment trust NEDs who can demonstrate direct experience of chairing an audit or management engagement committee at a trust, of managing a performance review process, or of navigating a trust reconstruction or wind-up are in higher demand than those whose investment trust experience is primarily supervisory.

Remuneration Considerations Under MIFIDPRU

Asset management firms subject to MIFIDPRU face specific remuneration requirements that affect how senior appointments can be structured. Material risk takers and senior management function holders at non-SNI firms are subject to deferral, malus and clawback requirements that must be reflected in offer structures from the point of appointment. Firms that design remuneration packages for senior hires without adequate regulatory advice at the outset frequently find themselves restructuring arrangements that do not meet MIFIDPRU requirements once compliance review is complete — creating both retention risk and regulatory risk.

Exec Capital advises clients on market-rate remuneration structures for asset management senior appointments and on how to ensure those structures are consistent with the applicable regulatory framework from the outset.

Conflicts of Interest and Board Independence at Investment Managers

Conflicts of interest are a defining governance challenge for investment management boards in a way that has few parallels in other sectors. The potential for conflicts to arise — between the firm’s commercial interests and the interests of fund investors, between different classes of investors in the same fund, between proprietary positions and client portfolios, and between the investment manager’s distribution arrangements and investors’ interests in accessing the most suitable products — is structural rather than incidental. The FCA’s supervisory approach to investment managers reflects this, with particular focus on whether boards are genuinely managing these conflicts rather than simply documenting them.

Board independence is the primary structural protection against conflicts being inadequately managed. The FCA expects investment management boards to have sufficient independent NEDs to provide genuine oversight of the firm’s conflict management arrangements, including its distribution agreements, fee structures, performance fee calculations, and related party transactions. NEDs who are genuinely independent — with no commercial relationships with the investment manager, its parent, or its major clients that might compromise their objectivity — are increasingly sought after in the investment management sector, and their scarcity is a consistent challenge for nomination committees.

Exec Capital assesses NED candidates for investment management mandates specifically against their independence profile, their understanding of the conflict structures common to the sector, and their track record of providing effective independent challenge in previous governance roles. We advise nomination committees on how to structure the NED brief to attract the genuinely independent candidates the FCA expects, rather than settling for candidates whose independence is technically compliant but practically limited by close relationships with the investment management community.

Consumer Duty at Retail-Facing Asset Managers

Asset managers who distribute products to retail investors — directly or through advised and non-advised distribution channels — are subject to the full scope of Consumer Duty. The governance implications for boards at retail-facing investment managers are significant. The Consumer Duty board report, required annually, must demonstrate that the board has reviewed whether the firm’s products and services deliver good outcomes for retail investors — covering price and value, consumer understanding, consumer support, and the appropriateness of the product design for the target market.

For investment product manufacturers, the value assessment is particularly demanding. The FCA expects firms to demonstrate, not simply assert, that the ongoing charges and performance fees levied on retail investors represent fair value given the outcomes actually delivered. For products with significant underperformance versus benchmark, or where charges have increased without a corresponding improvement in outcomes, the board’s Consumer Duty report must address the gap directly and set out what action the firm is taking.

Nomination committees at retail-facing asset managers should therefore prioritise Consumer Duty literacy when making NED appointments. The ideal NED profile for a retail investment manager combines investment expertise (to challenge the product range and performance framework), governance experience (to structure the Consumer Duty oversight process effectively), and direct consumer-facing financial services experience (to bring genuine perspective on the investor experience the firm is delivering). This combination is scarce, and boards that define the brief with this specificity in mind will produce better appointment outcomes than those that default to a broad “financial services NED” profile.

Succession Planning at Asset Management Firms

Succession planning at asset management firms presents specific challenges that reflect the concentration of investment skill and client relationship ownership that characterises many investment businesses. At fundamental manager-centric boutiques — firms where the investment returns, the client relationships, and the brand are all associated with a small number of key individuals — succession planning is both commercially and regulatorily critical. The FCA expects regulated firms to have succession plans for their senior management functions, and at boutique managers the succession plan for the CEO or CIO is often the most important strategic document the board produces.

The challenge is that the qualities that make a senior investment manager commercially irreplaceable also make them difficult to succeed. Replicating a long-established investment track record, a deep client network, and the specific investment philosophy that has driven returns over a decade is not achievable through a straightforward executive search. The succession strategy at most boutique investment managers therefore involves either a managed transition over several years — during which successors are identified, developed and progressively given greater client exposure — or a structural change to the business model that reduces the concentration of commercial dependency on a single individual.

Exec Capital advises investment management firms on how to approach succession planning for key investment and commercial roles, and we conduct the search process when external succession candidates are required. We maintain relationships with senior investment professionals who are open to succession or partnership arrangements at established boutiques, and we understand the specific commercial and cultural dynamics that make investment management succession different from succession at other types of financial services firm.

Working with Exec Capital

Exec Capital places executives and NEDs at asset management firms across the full range of firm types — from boutique active managers to global multi-asset businesses. Our searches are conducted on a retained or contingency basis depending on mandate complexity, and we support the FCA approval process as an integrated part of every assignment. Call Adrian Lawrence FCA on 0203 834 9616.