The Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA) and Bank of England (the regulators) have published a Discussion Paper (DP21/2) seeking the industry’s views and input on their plans to improve diversity and inclusion in financial services.
The paper demonstrates thoughtful commitment to the value of diversity and inclusion in the workplace and for the sector as a whole; acknowledging that this is a "journey" that both "the regulators and regulated" are on together; and that the conversation in the industry is "in many ways still in its infancy". Comments on DP21/2 are to be submitted by 30 September 2021, to inform the rules and guidance the regulators intend to propose for regulated firms thereafter.
The foundations for this concerted effort have been laid by the regulators with more intensity in recent months, as I have reported in earlier blogs. The regulators’ stated intention is "to engage financial firms and other stakeholders in a discussion on how [the regulators] can accelerate the pace of meaningful change and what role [the regulators] can most usefully play to support this change."
The direction of travel is clear: the regulators are committed to deploying their regulatory tools to facilitate increased diversity and inclusion in regulated firms on the basis that this will advance their statutory objectives of protecting consumers and enhancing market integrity. Equally, the regulators are clear that a "one-size-fits-all" approach will not be appropriate or proportionate for all firms and have specifically stated that they aim to avoid imposing rules that would not work for smaller firms.
In the paper, the regulators observe that greater diversity permits a range of views to be expressed across an organisation; and combined with an environment which enables and supports speaking up, it reduces the risk of groupthink, inadequate consumer outcomes and poor market conduct. At the same time, psychological safety is recognised as the essential ingredient for a truly inclusive culture. Those familiar with reading FCA Final Notices will be aware that on too many occasions, firms failing to meet the standards expected of them have suffered from groupthink, internal communication failures and environments which did not make room for healthy dialogue or challenge.
Ultimately, the proposed measures are intended to achieve improved governance, decision-making and risk management within firms, while at the same time promoting healthy working cultures and innovation.
For example, the paper contemplates (amongst other measures):
- the use of targets for representation amongst employees of regulated firms beyond board-level;
- specific measures to make senior managers (usually existing defined Senior Managers under the SM&CR) directly accountable for diversity and inclusion in their firms;
- linking senior management remuneration to diversity and inclusion metrics;
- the desirability of a published diversity and inclusion policy and/or mandatory training on diversity and inclusion for regulated firms; and
- the collection of data from firms about their workforce, noting the importance of qualitative data to monitor progress.
If adopted, these proposals will likely require firms to allocate dedicated resource to manage and monitor their implementation.
The following findings in support of the regulators’ proposals caught my eye:
- strides have been made in greater female representation in the sector: the proportion of women working in authorised positions in the UK banking sector rose from 9% in 2001 to 20% at the end of 2020. However, in 2020, only 13 of FTSE350 CEOs were women (5%);
- progress has been poor for ethnic minorities and with respect to social mobility: the "situation for ethnic minorities shows signs of going into reverse", with a decline in the number of black leaders and the "black pipeline" to senior management; and
- fewer than 1 in 10 management roles in financial services are held by black, Asian or other ethnic minority people. Meanwhile, one study reported that 89% of senior roles are held by people from higher socio-economic backgrounds.
In my view, there is much food for thought in DP21/2. The paper demonstrates a sincere commitment to meaningfully changing the diversity and inclusion "narrative" in the financial services sector. It is encouraging, albeit a little bit daunting to see the scale of change required to make for a more inclusive and equitable financial services sector. I hope that regulated firms will embrace the challenge - and that their advisors will stand ready to support them.