Schroders and Aviva Investors CEOs have warned of the dangers of the Senior Managers and Certification Regime (SMCR), which they said could enhance the hierarchical structure within asset management and lead to decisions being made by senior management who do not have the same specialist knowledge in a particular field as employees in the levels below them.
Speaking at the Investment Association's Culture In Investment Management event, Peter Harrison and Euan Munro said there would be a number of "unintended consequences" from the incoming regulation.
SMCR, which comes into effect for wealth and asset managers on 9 December 2019, is an attempt by the Financial Conduct Authority (FCA) to make senior figures in firms more responsible and accountable for their actions.
Under the new regime, the following roles will be considered senior manager functions (SMFs): chief executive (SMF1), executive director (SMF3), chair (SMF9), compliance oversight (SMF16), money laundering reporting officer (SMF17) and partner (SMF27).
Earlier this year, the FCA published a White Paper, entitled Transforming Culture in Financial Services, which said post-financial crisis regulatory initiatives alone were not enough and firms must create a culture that embraces the "spirit" of regulation.
It added: "SMCR provides a robust framework for individuals and leaders to think about their actions, but this needs to move beyond simple compliance with the rules. What else can be done?"
However, Harrison said the new piece of regulation would emphasise the hierarchical structure within asset management firms.
He warned this could have a major impact on an industry already undergoing "huge change".
"We need to be careful of the unintended consequences from SMCR," he continued. "It could have a long-term impact."
Munro added the new regulation would lead to decisions unnecessarily being made by executives at a higher level.
The Aviva Investors chief executive said one of the strengths of fund management is the industry's proficiency in pushing down to the right level of competence.
He added decisions would in fact be made more poorly by senior executives without the specialised knowledge of employees one or two levels below them.
"One thing that makes asset management an exciting place for smart graduates is they are making substantial financial decisions early on in their career," he explained.
"The problem with SMCR is it will push decision making up, to the point a lot of decisions made in higher positions could be made one or two levels down. Inevitably, if I can go to jail for decisions [made by employees] one or two levels down, then I will not leave those decisions to someone else."
The pair warned merger and acquisition activity was another area that could have a "painful" impact on culture with firms focusing more on the financial results rather than the broader outcome.
Munro said merging companies needed to be "very aware" of creating an average culture of the two firms, where one tries to combine two separate approaches, as this would not work in either business' market.
Consolidation within the investment industry has increased over the past couple of years with big deals including Henderson Global Investors and Janus Capital merging to form Janus Henderson Investors and Standard Life and Aberdeen Asset Management combining to become Standard Life Aberdeen.
"Culture needs to be a deliberate strategy and some of the mergers I have seen have been driven by the financials with not enough thought on the culture," Munro added.