Do NEDs Need FCA Approval? Understanding the Regulatory Role of Financial Services Directors

Welcome to the NED Capital Podcast.

Being appointed as a Non-Executive Director can look very different depending on the organisation. A NED joining the board of a privately owned manufacturing business will face a different governance environment from someone joining the board of a bank, insurer, asset manager or other FCA-regulated financial services firm.

One of the most important differences is the regulatory framework surrounding the appointment.

So, do Non-Executive Directors need FCA approval?

The short answer is: some do, depending on the role and the regulatory status of the firm.

Understanding that distinction is important for both boards making appointments and individuals considering their first regulated NED role.

Why FCA Approval Matters

The Financial Conduct Authority has a particular interest in who occupies senior positions within regulated financial services businesses.

The Senior Managers and Certification Regime, or SM&CR, is designed to establish clearer individual accountability within regulated firms. Certain senior roles are designated as Senior Management Functions, and individuals performing those functions generally require regulatory approval before taking up the position.

For a board, this means that appointing a NED can involve considerably more than agreeing a candidate and issuing an appointment letter.

The board needs to consider the individual's suitability, experience, independence and ability to perform the responsibilities attached to the role.

This is one reason why FCA Regulated Board Governance requires a more specialised approach than a conventional NED appointment.

Not Every NED Is Automatically an FCA-Approved Person

It is important not to assume that every NED sitting on the board of an FCA-regulated company requires exactly the same approval.

The regulatory position depends on the firm's regulatory status and the particular function the individual will perform.

Certain board positions are specifically designated as Senior Management Functions. These can include the Chair, depending on the firm's circumstances, as well as certain committee chairs and the Senior Independent Director.

For example, financial services board appointments can include SMF9 for the Chair, SMF10 for the Chair of the Risk Committee, SMF11 for the Chair of the Audit Committee and SMF14 for the Senior Independent Director.

That means the question should not simply be:

“Is this person a NED?”

It should be:

“What role will this NED actually perform within this particular regulated firm?”

That distinction can fundamentally change the appointment process.

The Difference Between a Normal NED Search and a Regulated Appointment

For a conventional NED search, a board may focus heavily on sector experience, strategic capability, independence, financial literacy and boardroom experience.

Those factors remain important in financial services.

But they are joined by another layer of considerations.

The candidate may need to demonstrate an understanding of the regulatory environment, appropriate governance experience and the ability to exercise effective oversight in an environment where individual accountability is much more explicit.

The candidate also needs to understand that being a NED of a regulated financial institution is not simply about attending board meetings and offering occasional strategic advice.

There is genuine responsibility attached to the role.

Fitness and Propriety

Where regulatory approval is required, the individual's fitness and propriety becomes an important part of the appointment.

The regulator considers whether the person is suitable to perform the relevant senior function. This includes matters such as honesty and integrity, competence and capability, and financial soundness where relevant to the regulatory assessment.

For candidates, this means preparation matters.

A strong conventional board CV does not automatically answer every question that may arise in a regulated appointment.

The candidate needs to be able to demonstrate why their experience is relevant to the particular responsibilities of the role and how they will exercise appropriate judgement and oversight.

For the board, it also means that regulatory considerations should be incorporated into the search from the beginning rather than treated as an administrative issue at the end.

Individual Accountability Changes the Nature of the Role

The SM&CR has also changed the way senior responsibility is considered within regulated firms.

The principle is relatively straightforward: important responsibilities should have clearly identified individuals who are accountable for them.

For a NED occupying a designated Senior Management Function, that creates a direct connection between the responsibilities of the role and the individual holding it.

This makes the quality of the appointment particularly important.

A board should not appoint someone simply because they have an impressive corporate career or because they have previously sat on several boards.

The question is whether they can actually perform the responsibilities of the specific regulated role.

That requires judgement, regulatory awareness and the willingness to challenge management when necessary.

Independence Still Matters

There is another important consideration: independence.

A regulated board needs directors who can provide effective challenge rather than simply support the executive team.

Independence is not merely a box to tick during the recruitment process. It affects how a NED approaches difficult decisions, conflicts of interest, risk, remuneration, financial reporting and strategic proposals.

This is particularly important in financial services because the board may have to challenge management on matters involving regulatory compliance, risk appetite, capital, liquidity, customer outcomes or operational resilience.

The strongest candidate therefore needs both the confidence to challenge and the judgement to know when challenge is necessary.

What Should Boards Look for in a Regulated NED?

There is no single profile that applies to every financial services board.

A bank may require significant banking, risk or regulatory experience.

An insurer may need someone with knowledge of insurance, actuarial matters or prudential regulation.

An asset manager may prioritise investment governance and client understanding.

A fintech may need directors who can combine regulatory awareness with technology and growth experience.

Committee responsibilities can also change the requirements.

An Audit Committee Chair will need a different technical background from a Risk Committee Chair, while a Chair or Senior Independent Director needs a broader understanding of board leadership and governance.

That is why the role should be defined carefully before the search begins.

FCA Approval Should Be Considered Early

One of the practical lessons for boards is that regulatory approval should not be treated as something that happens after the recruitment decision.

If a candidate is going to perform a Senior Management Function, the board needs to understand the regulatory implications from the outset.

The candidate needs to understand them too.

This affects the search specification, candidate assessment, interview process, references, documentation and ultimately the timetable for the appointment.

It also means that boards should avoid assuming that a candidate who has been successful in an unregulated business will automatically transfer successfully into a regulated environment.

The governance expectations can be substantially different.

What Does This Mean for NED Candidates?

For experienced directors considering moving into financial services, FCA-regulated NED appointments can provide an opportunity to apply board experience in a more highly governed environment.

Our guide to FCA approval for NEDs explores the issue in more detail, including the regulatory framework and the circumstances in which NEDs may require approval.

At NED Capital, our FCA-regulated board governance work focuses on NED and Chair appointments within regulated firms, with the regulatory and governance requirements considered as part of the search rather than added afterwards.

The objective is to identify directors who can contribute effectively to the board while understanding the responsibilities that come with operating in a regulated environment.

So, when asking whether a NED needs FCA approval, the most useful starting point is not simply the job title.

It is the specific function, the firm's regulatory status and the responsibilities attached to the appointment.

For boards making an appointment, getting that distinction right at the beginning can make the recruitment process considerably more robust.

For candidates, understanding it before accepting the role is equally important.

Visit FCA Regulated Board Governance and read our guide to FCA approval for NEDs for a deeper look at regulated NED appointments and the approval process.