On 28 January 2021, the FCA published a speech by its now former Chief Operating Officer, Georgina Philippou on why it cares about diversity and inclusion. She explained that as an employer, the FCA wants to be as diverse and inclusive as possible and as a regulator it wants to move the dial on diversity and inclusion within the financial services sector.
Ms Philippou’s speech made it clear that employees should be encouraged to bring their ‘whole selves’ to work and should feel safe enough to do so. Inclusion is key. Without inclusion, the value of diversity will not be realised and will not lead to better decision making. The whole of the financial services industry is responsible for creating and maintaining cultures that embody diversity and inclusion and how a firm prioritises this is a clear indication of its culture. The FCA views diversity and inclusion as relevant to its high level principles, including ‘integrity’ and ‘treating customers fairly’.
This commitment by the FCA was emphasised again last month in the speech by Nikhil Rathi, CEO of the FCA, who made clear that the FCA cares about diversity and inclusion “because diversity reduces conduct risk and those firms that fail to reflect society run the risk of poorly serving diverse communities. And at that point, diversity and inclusion become regulatory issues”. Mr Rathi goes on to say “this is much broader than representation. It is about a firm’s culture. Not just in relation to diversity, but inclusion too. Do people feel comfortable in the work environment such that they can demonstrate, share and bring to bear their diversity of experience and background?”
The FCA is making it clear that it is increasing its focus on diversity and inclusion
The business case for diversity and inclusion has been made clear over and over again: it leads to better cultures, appreciation of risk, decision-making and performance. So it’s not surprising that this is high on the regulatory agenda. Last year the FCA said that it would increase its focus on diversity and inclusion and Mr Rathi’s comments make clear that if the FCA doesn’t see improvements in diversity at senior levels it will consider how best it can use its powers. For example it says it will be asking firms tough questions about their diversity, inclusion, culture and safe spaces for employees to ‘speak up’. He also hints at probing more into the diversity of management teams saying that this could be part of the FCA’s consideration of senior manager applications for approval.
Although there aren’t any specific rules in its Handbook that require firms to be diverse, or even have diversity policies, the FCA is taking note of the approach in America which has seen the NASDAQ take the lead with its listing rules now requiring all companies listed on its US exchange to have, or be able to explain why they do not have at least two ‘diverse’ directors (meaning self-identified female, under-represented minority race or LGBTQ). The FCA is exploring whether it should introduce similar requirements as part of its premium listing rules. Mr Rathi also noted that the FCA and Prudential Regulation Authority are working together to formulate a joint approach to diversity and inclusion – it remains to be seen what this will look like. What we do know is that firms need to be taking steps now to look at how they can embed diversity and inclusion into their culture.
The FCA has launched a whistleblowing campaign to encourage employees to ‘speak up’
The underlying theme of the recent speeches has been the FCA’s desire to promote good culture. As well as promoting diversity and inclusion, in both speeches the FCA emphasised that the importance of ‘speaking up’ and having the psychological safety to do so is crucial to harnessing an inclusive culture. Not only must employees feel safe enough to share ideas, leaders must acknowledge their status and support an environment of psychological safety and collaboration.
Where employees ‘speak up’, leaders must ‘listen up’. The FCA considers that a firm’s response to when employees do speak out is often key to determining whether they or their colleagues will feel safe enough to do so again in the future. The role of leaders cannot be underestimated in fostering a safe, inclusive environment: one small mis-step can undermine years of positive work in developing a strategy and an inclusive environment.
To underline its commitment to speaking up, the FCA has launched a campaign to encourage individuals to blow the whistle and report wrong-doing, saying individuals should be able to do so ‘in confidence, with confidence’. Whistle-blowers that report matters to the FCA can do so confident that their identity will be protected, and they will now have a dedicated case manager that they can meet with and discuss their concerns and receive updates throughout the investigation.
Firms must have effective arrangements in place for employees to raise concerns
Firms are required to have effective arrangements in place for employees to raise concerns and to guarantee that these concerns will be handled appropriately and confidentially. They are also required to appoint a whistle-blowers’ champion and to make sure there is senior manager oversight of the effectiveness and integrity of the process. A firm must also have effective arrangements in place to make sure whistle-blowers are protected from victimisation and to oversee the preparation of an annual report to the firm’s governing body.
What should firms be doing now?
Firms should anticipate an increasing focus on diversity, inclusion and speaking up from the regulators. Not only must the correct policies be put in place, but firms must be able to demonstrate an active commitment to each of these areas and be prepared for increasing challenges and questions about this at the authorisation and approval stages.
To discuss the matters raised in the article further, please contact Olivia Toulson on [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 April 2021.