What the Regime Requires at Board Level

Under the Senior Managers and Certification Regime, the non-executive Senior Manager Functions depend on the firm’s tier. At an Enhanced firm, the Chair (SMF9), the Chairs of the Risk, Audit and Remuneration Committees (SMF10, SMF11 and SMF12), the Chair of the Nominations Committee (SMF13) and the Senior Independent Director (SMF14) can all be Senior Manager roles, each requiring regulatory approval before the individual starts. Dual-regulated banks and insurers carry an equivalent set under the Prudential Regulation Authority’s rules.

At a Core firm, the picture is simpler. The Chair of the governing body is the main non-executive Senior Manager Function, and many smaller firms don’t have a separate chair at all. Other non-executive directors who don’t hold a Senior Manager Function are still covered by the Conduct Rules, so they’re expected to act with integrity, due skill, care and diligence, and to be open with the regulators. Our guide to which SMFs apply at each firm tier sets out the full mapping.

That means a Core firm can meet the letter of the regime with no independent non-executive at all. Many do. The question is whether that serves the firm well, and increasingly the answer is no.

Why Independent Challenge Matters Even When It Isn’t Required

The Regulator Looks at How Decisions Are Made

The FCA’s approach to smaller firms relies heavily on how the firm governs itself. When supervisors review a firm, they look at who makes key decisions, how those decisions are challenged and recorded, and whether the board has the information it needs. A board made up entirely of founders and executives can work well, but it has an obvious weakness: nobody in the room is independent of the business’s commercial interests.

That matters most at the moments the regulator cares about most. When a firm is deciding whether a product delivers fair value under the Consumer Duty, whether to take on a higher-risk client segment, or how to respond to a complaint trend, an independent voice makes it more likely the decision will stand up to scrutiny later.

Senior Managers Need Someone to Report To

At a small firm, the compliance officer and MLRO often report to the same founders whose decisions they’re meant to challenge. An independent non-executive, particularly one chairing a risk or audit committee even informally, gives the control functions a route to the board that doesn’t run through the chief executive. That independence is one of the strongest protections a compliance oversight or MLRO holder can have, and it’s a point strong candidates raise at interview.

It Strengthens Growth Plans

Firms planning to raise capital, seek new permissions or move towards Enhanced status benefit from building governance ahead of the requirement. Investors increasingly ask about board composition as part of due diligence, and a firm that already has independent oversight in place makes a more convincing case to both investors and the regulator. Our article on building a multi-SMF team covers what changes when a firm crosses into Enhanced status.

What a Good Independent Non-Executive Brings

The value of a non-executive depends almost entirely on the fit between their experience and the firm’s risks. In our experience, the most effective appointments at smaller regulated firms share four qualities.

• Relevant regulatory experience. They have sat on, or reported to, the board of a regulated firm in the same or a closely related sector, and they understand what the regulator expects without needing it explained.
• A specialism the board lacks. Most commonly this is risk, audit and finance, or consumer outcomes. A founder-led board rarely lacks commercial energy; it more often lacks someone who reads a risk report the way a supervisor would.
• Genuine independence. No material business relationship with the firm or its founders, and a willingness to disagree in the boardroom and to put that disagreement on record.
• Time and availability. A non-executive who can’t read the papers properly or attend when an issue arises offers little protection. The commitment should be realistic and agreed in writing.

The UK Corporate Governance Code doesn’t formally apply to most smaller regulated firms, but its principles on independence, board composition and the role of committees are a useful reference, and many firms choose to follow them proportionately.

Common Mistakes When Appointing a Non-Executive

Appointing a Friend of the Founder

The most common mistake is appointing someone the founders already know and trust. Trust is important, but a close personal or commercial relationship makes independent challenge harder, and it can undermine the appointment in the regulator’s eyes. The best appointments usually come from outside the founders’ immediate network.

Choosing Seniority Over Relevance

A distinguished career at a large bank doesn’t automatically translate into useful oversight of a twenty-person investment firm or consumer lender. What matters is whether the individual understands the firm’s specific risks and can work at its scale.

Leaving the Role Undefined

A non-executive without a clear remit tends to drift. Firms should agree what the individual will oversee, which committees they’ll attend or chair, what information they’ll receive and how often the board will meet. If the appointment carries a Senior Manager Function, the Statement of Responsibilities makes this explicit. If it doesn’t, a clear letter of appointment serves the same purpose.

Treating Approval as an Afterthought

Where the role is a Senior Manager Function, such as Chair at a Core firm or a committee chair at an Enhanced firm, the individual can’t start until the regulator has approved them. The application is assessed against the fit and proper test, and the regulator can take up to three months to decide once it has a complete application. Planning the appointment around that timetable avoids a gap. Our guide to how long an SMF appointment actually takes sets out the stages.

Where to Find the Right Non-Executive

Strong independent non-executives for smaller regulated firms rarely come from open advertising. Most are experienced executives who have moved into portfolio careers, former Senior Managers who want to stay close to the sector, or specialists in risk, audit or conduct who take on a small number of board roles alongside other work.

Finding them usually means a targeted search. For non-executive and board-level appointments across the regulated market, our sister practice NED Capital specialises in independent directors, chairs and governance appointments, including first non-executive appointments for founder-led firms. Where the role carries a Senior Manager Function, SMF Capital runs the search with the regulatory approval built in from the start, and we work together where a firm needs both.

Before starting a search, it’s worth answering three questions:

• What specific risks or gaps should the non-executive help the board address?
• Will the role carry a Senior Manager Function now, or is it likely to in the next two years?
• How much time can the firm reasonably ask for, and what will it pay for that commitment?

Clear answers make for a sharper specification, a better shortlist and a smoother approval if one is needed.

What Candidates Should Ask Before Accepting

Experienced non-executives are selective about the boards they join, particularly in regulated firms, where accountability can be personal. Before accepting a role, they typically want to understand:

• the firm’s regulatory history, including any past supervisory concerns, skilled person reviews or open complaints trends
• the quality of management information the board receives
• how the compliance and risk functions are resourced and to whom they report
• the firm’s plans for growth and any upcoming permission changes
• directors’ and officers’ insurance cover.

Firms that answer these questions openly attract stronger candidates. Those that are guarded tend to find that the best people decline. The FCA Financial Services Register also lets both sides check each other’s regulatory history before conversations go too far.

The Bottom Line

For smaller regulated firms, an independent non-executive is rarely a regulatory requirement, but it’s often the single most effective governance improvement available. It gives the control functions a route to the board, brings a supervisor’s eye to key decisions and strengthens the firm’s case with investors and the regulator. The key is choosing someone whose experience matches the firm’s risks, giving them a clear role and planning any approval from the outset.