Regulators identify D&I as fundamental culture issue, with larger firms potentially subject to mandatory disclosure rules from 2024.
Alicia Kedzierski, Head of ESG and D&I at the UK Financial Conduct Authority (FCA), has urged financial services firms to bolster their diversity and inclusion (D&I) focus to address ‘groupthink’ and combat underperformance.
“Where firms are better equipped to tackle groupthink and improve decision-making, this can contribute to market integrity,” she said, speaking at the City and Financial Global Ethnic Diversity and Inclusion Summit on 27 September.
“Where they have a greater understanding of the diverse needs of their consumers, this can support consumer protection,” Kedzierski added.
“Where firms seek to innovate and tailor their offering to meet these diverse needs, this can contribute to greater competition and where firms unlock new talent and widen the sector’s talent pool, this can further growth and competitiveness.”
Alongside the Prudential Regulation Authority (PRA), the FCA is currently consulting on the need to introduce a new regulatory framework to improve D&I in the UK’s financial sector, a move which both regulators argue will deliver better internal governance, decision-making and risk management.
The proposals outline new rules, guidance and minimum standards on misconduct that poses a risk to healthy firm culture, such as workplace bullying and sexual harassment, to ensure that firms can take “decisive and appropriate action” against employees that exhibit such behaviour.
They will apply to FCA-regulated asset managers and asset owners, including life insurers and pension providers.
Within the consultation, the regulators cited the importance of proportionality, with smaller firms (250 employees or less) and limited scope firms not subject to the same requirements, such as mandatory reporting of certain diversity data, strategies and targets.
“Interestingly, though – and importantly – rules on non-financial misconduct would apply to all firms whatever their size,” noted Sophie White, Partner in Employment at law firm Eversheds Sutherland.
“Until now, non-financial misconduct has been widely referred to in FCA and PRA speeches, but no changes made to the rules themselves, leading to some uncertainty for firms depending on the circumstances of the misconduct and their own interpretation of the regulatory framework,” she said.
The consultation is open to feedback until 18 December, with final rules planned for 2024.
Last year, Reboot, a campaign group of senior financial services professionals promoting diversity, equity and inclusion (DEI), published research highlighting a slight improvement in average DEI scores across 392 UK financial services firms, which collectively represent £1.4 trillion (US$1.7 trillion) in annual revenue. Their average score was 67 out of 100, up from 65 in 2021.
However, it noted that asset management firms are lagging behind, with their average score falling from 66 to 64.
The Women in Finance Charter annual review last year said that female representation in senior management among charter signatories averaged 35%.
The latest Parker Review noted that over 100 of FTSE 250 companies either have no ethnic minority representation on their boards or are unable or unwilling to disclose the data.
Further, CityWire’s Alpha Female 2023 report said the number of female fund managers in the UK increased to just 12% last year.
The FCA and PRA’s consultation follows two years of discourse with financial services firms.
A 2021 discussion paper was published by the FCA, PRA and Bank of England to get a better understanding of D&I in regulated firms, give firms a clearer picture of their current position, encourage further industry action, and to inform the development of their supervisory approach going forward.
In 2022, the FCA published the findings of its 2021 discussion paper, finding a “surprising degree of consistency” among the firms it spoke to, with all in the early stages of their approach to D&I, typically having started serious efforts in 2019 or 2020.
While “almost all” were committed to making progress, the FCA said they “lacked both a clear articulation of purpose and actions oriented to achieving their goals”.
“Very few firms seemed to have understood D&I as a fundamental culture issue,” the FCA said.
“Generally, we found much less understanding of and focus on building inclusive cultures than on actions to measure diversity and address specific issues.”
The 2022 feedback paper further noted that most firms were largely focused on gender representation, as opposed to ethnicity.
On both gender and ethnicity, firms tended to focus on improving representation at the senior leadership level, despite data highlighting that the biggest drop-off in representation is from junior to middle management levels, which the FCA warned creates an unsustainable culture where firms attempt to ‘poach’ diverse senior talent rather than develop their own pipelines.
The FCA’s 2022 summary also highlighted the wide variation in D&I-related data quality, which it acknowledged affects firms’ abilities to carry out analysis and identify areas for improvement.
“Flexibility is at the heart of the proposals,” said the FCA in a statement partnering the 2023 consultation release, noting that, as each firm is different, they need to come up with their own solutions.
The UK’s Department for Work and Pensions launched a taskforce in 2022 to guide pension schemes in their understanding and disclosure of social-related investment risks, identifying reliable data and metrics providing clear insight of social risks.
The UK Pensions Regulator (TPR) launched its own survey in July to assess diversity among pension scheme trustees, following research into defined contribution pension schemes that determined most do not formally capture diversity data.
“For UK financial services to be competitive and for the companies in it to be well run with healthy work environments, it’s vital they attract, retain and promote the best talent,” said FCA CEO Nikhil Rathi.
“The data suggests this isn’t happening. Our proposals will encourage the largest firms to put in place plans and report against their delivery,” he said.
“We have taken a lead among regulators in taking a clear stance that non-financial misconduct, such as sexual harassment, is misconduct for regulatory purposes,” Rathi added.
“We’re strengthening our expectations on how the firms we regulate consider such misconduct when deciding whether someone is fit and proper to work within the industry.”
This month, the FCA also closed its three-month consultation on the development of a voluntary vote reporting template for UK-based asset managers to ensure asset owners have access to more consistent, up-to-date and comparable data. Market participants have reaffirmed their desire for the template to be made mandatory.