The Financial Conduct Authority (FCA), Prudential Regulatory Authority (PRA) and the Bank of England have issued a joint discussion paper seeking views on improving equality and diversity in the financial services sector.
The regulators consider that whilst much has already been done, the pace of change has been slow and there is still some considerable way to go. They acknowledge that large gender and ethnicity pay gaps still exist and there is a lack of diversity at a senior level. The paper pulls no punches when it comes to articulating its aims. It wants “rapid and more substantive progress to be made across the financial sector”.
Open until 30 September 2021, the paper seeks views on 29 questions covering a range of topics. It includes a number of suggestions for firms to improve diversity and inclusion, such as the use of targets for representation, measures to make senior leaders directly accountable for diversity and inclusion in their firms, linking remuneration to diversity and inclusion metrics and using its existing regulatory powers to hold individuals accountable.
The paper also highlights the importance of data collection, monitoring and disclosure in order to enable firms, regulators and other stakeholders to monitor progress.
You can find a link at the bottom of this article to the paper if you would like to submit your views.
Why has this discussion paper been issued?
The statistics and research papers quoted, make for sober reading. Whilst progress has been made, the rate of change has been slow. Trends are promising for gender albeit, the Board Monitor Europe (2019) reported that the UK financial services industry was below average for new directorship appointments. 39% of new directors appointed to FTSE250 financial company boards in the UK in 2019 were female compared with 42% of all appointments in the FTSE250.
The situation for ethnic diversity has not improved and in fact shows signs of going into reverse. Early findings from the Green Park Business Leaders Index 2021 show a decline in the number of black leaders and potential black leaders in the pipeline. Fewer than 1 in 10 management roles in financial services are held by black, Asian or other ethnic minority people.
The paper notes that data on many aspects of diversity is poor, making it hard to assess the full extent of the problem and many studies have been hampered by incomplete data.
What do the regulators want to achieve?
The regulators want to start a discussion on setting higher standards in the industry. They think that greater diversity will reduce the risk of ‘group think’ which will improve decision making, consumer outcomes and standards of market conduct.
They want firms to think about how they can advance diversity and inclusion through improving their policies, governance arrangements, accountability, remuneration arrangements and disclosure. In particular, they want data collection in firms to improve.
What are the regulators proposing?
Below is a summary of some of the key issues raised in the discussion paper and potential areas for future regulation and guidance.
Data collection is key
The paper states that one of the key potential expectations would be for firms to develop metrics that enable monitoring of their diversity and inclusion initiatives. To help inform further policy development, which could include proposals for regulatory reporting, the regulators intend to issue a one-off voluntary pilot data survey this autumn that will understand what data is currently collected as well as potential challenges and barriers. Firms would be asked to provide aggregate and anonymised data that they already hold, as well as their ability to collect information on all of the nine protected characteristics (age, sex, race, religion or belief, disability, gender reassignment, pregnancy and maternity, marriage and civil partnership and sexual orientation) plus socio-economic background to understand what is currently collected.
The regulators hint at a future proposal around regular data collection which would involve firms approaching staff to complete a questionnaire. Whilst it recognises some individuals might be reluctant to take part, it expects firms to create a culture to encourage their staff by making clear the benefits of such declarations.
The regulators are aware that for many smaller firms and sole-traders with few employees, the proposals would be difficult to meaningfully enact, so future expectations on such firms are likely to be high level.
Tone from the top – making Boards more diverse
The paper expects leaders to set a compelling strategy and empower teams to develop and implement initiatives that deliver cultural change. Boards should monitor and challenge progress on diversity at all levels.
The paper considers that the credibility of a firm’s diversity strategy could be called into question if it is overseen by a homogenous group without diverse experience and thought and this needs to be a key consideration in recruitment strategy. The regulators note that targets are a powerful mechanism for change and seek views on whether there is a case for applying such requirements to a wide range of firms.
It also seeks views on the merits of requiring firms to set targets for under-represented groups in relation to entry into the wider senior management population as well as customer facing roles.
Publishing data is another potential tool and the regulators are looking at creating a template for minimum disclosures (for example data on pay gaps, senior management and workforce diversity and measures on inclusion taken from internal surveys). Feedback from smaller firms is sought here to ensure any proposals are kept proportionate.
Individual accountability for Senior Managers on diversity and inclusion
The regulators make it clear that making senior leaders directly accountable for diversity and inclusion (in addition to the collective responsibility of the Board) will drive change. It is keen to use SMCR as a mechanism for this and considers the possibility of including such responsibilities in the Senior Manager statement of responsibilities. It is exploring express allocation of responsibility for elements of diversity and inclusion to Senior Managers rather than making them more general. Good data and on-going monitoring is therefore going to be key to ensuring these responsibilities are going to be met. Where prescribed responsibilities are not a requirement in some firms, the regulators will expect all Senior Managers to take responsibility for developing and embedding healthy cultures.
Fitness and propriety assessments of an individual may also be utilised, and the paper cites examples of findings of sexual harassment, bullying and discrimination on the basis of someone’s protected characteristics all having the potential to call into question someone’s fitness and propriety going forward. Such behaviour (or failure to take steps to address such behaviour) could also result in a breach of the Conduct rules and the regulator suggests guidance could be developed to help firms ensure a more consistent approach and support inclusive cultures.
Applications for Senior Manager approval may also be subject to greater scrutiny and asking firms to collect and submit diversity data alongside an application is one tool being considered
Progress on diversity may be linked to remuneration
The regulators think that linking progress on diversity and inclusion to remuneration could be a key tool for driving accountability and incentivise progress.
Evidence shows that firms are increasingly linking diversity and inclusion to personal objectives of senior management. The regulators acknowledge that it may need to develop guidance on how metrics linked to advancing diversity and inclusion can be used as part of non-financial criteria when setting variable remuneration awards. Similarly, poor performance in this area could be grounds for a lower performance adjustment. The regulators welcome views on the value of remuneration committees or possible alternative arrangements for considering these issues in the remuneration process as well as improving governance in general.
Firm-wide policies, practices and training
The regulators think that clearly documented policies help to set out expectations of all staff on what diversity and inclusion means and they are seeking views on including a requirement for all firms to have such a policy and publish it on their website. Areas that it would like to see included could be around clear objectives, realistic goals, a plan for meeting those goals, and ways for measuring progress.
The regulators have also hinted at employees undertaking mandatory training – and then followed up and seeks views on what kinds of training might be effective.
The discussion paper is open until 30 September 2021 and the feedback and data received will be used to develop detailed proposals with a joint consultation planned for Q1 of 2022.
A link to the full paper is here: Diversity and inclusion in the financial sector – working together to drive change
If you have any questions on the contents of this article, please contact Olivia Toulson via [email protected] or 01223 643145.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at July 2021.