Regulator-backed diversity targets for financial service firms proposed
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Bank of England

UK regulators’ proposals for more intensive monitoring and public reporting of diversity and inclusion (D&I) within financial service firms could be “ground breaking” if enacted.

In a new discussion paper, the Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA), and Bank of England set out several options for improving D&I in the sector, chief among them is the linking of bosses’ pay to diversity targets.

A new requirement to regularly and publicly report on the demographic and socio-economic diversity of firms’ boards and broader workforce is also proposed. This could potentially include ethnicity data and information about other protected characteristics, including religion or belief, disability, and sexual orientation. 

The regulators believe that improving D&I across the sector will lead to better governance, decision-making, and risk management within firms, a more innovative industry, as well as products and services better suited to the diverse needs of consumers.

Nikhil Rathi, chief executive of the FCA said he was concerned that a lack of diversity and inclusion within firms could “weaken the quality of decision-making”, while Sir Jon Cunliffe, deputy governor for financial stability at the Bank of England, said D&I is “beneficial for financial stability”.

“Groupthink and overconfidence are often at the root of financial crises,” Cunliffe added. “Enabling a diversity of thought and allowing for an array of perspectives to coexist supports a resilient, safe, and effective financial system.”

The 2021 Women in Finance Charter Annual Review found that while nearly two-thirds (62%) of signatory companies – including Virgin Money, Allianz Insurance, and HSBC UK – increased the proportion of women in senior management over the past year, under one-third (32%) of senior roles were held by women on average across the sector, a 1% increase on 2019.

Meanwhile, new data from the Green Park Business Leaders Index 2021 revealed the number of black chairs, CEOs, and CFOs at FTSE 100 companies has dropped to zero. At FTSE100 board and executive committee level, the percentage of black executive directors and non-executive directors (1.1%) has also fallen since 2014 (1.3%). Only 10 of 297 (3.4%) leaders in the top three leadership roles have ethnic minority backgrounds.

Sam Woods, CEO of the PRA said that while some improvements had been made in parts of the financial services sector, more needed to be done to speed up progress.

“Regulators and industry need to work together to increase diversity at senior levels and ensure that the UK’s financial services firms are best equipped to serve the economy,” he said. “A lack of diversity of thought can lead to a lack of challenge to accepted views and ways of working, which risks compromising firms’ safety and soundness.”

To assess progress the authorities are proposing collecting data from firms about their workforce. Prior to this there will be a one-off, pilot survey later this year which will help to develop the proposals and test how firms’ can provide data with a view to considering regular reporting in the future.

Natasha Adom, a senior employment lawyer at GQ|Littler, said the plans could be “ground breaking” but that the challenge for regulators was to deliver a D&I policy “that has teeth”.

“Many of the policies they’ve laid out are very progressive as the feeling is that while there has been progress in certain areas, that rate of progress is not fast enough,” she said.

The discussion paper highlights the importance of data and disclosure to enable firms, regulators, and other stakeholders to monitor progress. Additional public reporting on staff ethnic and social background could help drive real change, said Adam, but she also warned that this was far from straightforward for employers.

“One of the big problems for businesses will be in the collection of this information,” she remarked. “The FCA acknowledges that, even aside from data protection issues, this will be challenging and will take time along with new systems and processes.

“Individuals can (naturally) be reticent about providing personal information and this reticence increases the more information that is requested. Thankfully, there will be a pilot project to gather data on diversity within workforces and further consultation before any mandatory changes are made.”

The regulators are also asking for views on how any changes could be tailored to specific categories of firms to ensure it is proportionate. Adom predicts much debate over the size of business that will have to report and whether smaller but still influential businesses, should be excluded from the reporting burden.

The FCA is also considering whether adverse conduct on diversity and inclusion should expressly affect whether an individual manager is deemed to be “fit and proper”.

“Failing a fit-and-proper test can exclude them from a position of responsibility within financial services,” explained Adom. “If that sanction were used it would make individuals sit up and notice, but as the FCA has acknowledged, employers would need clear guidance on how that would work.”

The discussion paper is open until 30 September 2021. The feedback and data received will be used to develop detailed proposals, with a joint consultation planned for Q1 2022.