Financial industry regulators have unveiled the start of a massive push to improve diversity and inclusivity throughout the sector with warnings that in some regards things are actually getting worse.
Key suggestions made include that senior manager pay and the fit and proper person test should be tied to metrics and other issues concerning diversity and inclusion.
The potential of setting targets, publishing data and making identified individuals along with boards responsible for progress are also part of the wide-ranging discussion document.
And the Financial Conduct Authority (FCA), Bank of England (BoE) and Prudential Regulatory Authority (PRA) which combined on the DP21/2 discussion paper, warned they would not be afraid to act on firms not responding.
The trio’s overarching aim is to speed up equality, diversity and inclusivity within the industry to improve outcomes for firms and customers.
They believe increased diversity and inclusion will result in improved governance, decision-making and risk management within firms, a more innovative industry, and products and services better suited to the diverse needs of consumers.
A voluntary pilot test of reporting diversity data from financial firms is set to begin in the autumn, while responses to the discussion paper are open until 30 September with a joint consultation expected next year.
‘Going into reverse’
These ideas are not part of a formal consultation to implement new rules, rather the beginning of a discussion with the industry, but the regulators make it clear throughout the paper that they expect to be taking action in this area.
The paper noted that: “While there has been progress over the past decade, the rate of change has been slow, and direction of travel polarised across organisations.”
While the number of women in executive positions has increased, this is at a slower rate than the wider UK economy and has not culminated in an increase in the representation of women at the very top of the FTSE 350.
“The situation for ethnic minorities shows signs of going into reverse,” the regulators warned, with early findings from the Green Park Business Leaders Index showing a decline in the number of black leaders and the black pipeline to senior management for FTSE 100 companies.
Remuneration
Considering remuneration policies, the regulators said: “Linking progress on diversity and inclusion to remuneration could be a key tool for driving accountability in firms and incentivise progress.”
“It could be helpful for the regulators 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 adjustment.”
They added that they want to explore a future environment where all senior managers who have responsibility for managing employees, should expect their performance against these objectives to be reflected in their variable remuneration, including the use of risk adjustments.
Where remuneration committees oversee a firm’s policy, this should oversee how obstacles producing pay gaps and other adverse outcomes are being managed in their firm.
Fit and proper person test
The regulators are also “exploring whether adverse findings in relation to individuals’ conduct with respect to diversity and inclusion issues could affect” assessments regarding if the person is fit and proper to carry out their role.
“We could develop guidance on this topic to include evidence of sexual harassment, bullying and discrimination on the basis of someone’s protected (or otherwise) characteristics as factors to take into account,” the regulators said.
Firms would need to assess whether evidence of such behaviour constituted a breach of the conduct rules which would need to be disclosed in future regulatory references.
“We think it could also be helpful for the regulators to develop guidance on how such behaviour, or failure to take reasonable steps to address these kinds of behaviour, could result in a breach of the conduct rules,” they continued.
“We believe that developing this guidance would provide firms and the regulators with clarity, leading to a more consistent approach and could have a significant impact on reducing non‑financial misconduct in the sector, supporting inclusive cultures.”
Targets, board, and executive responsibilities
The regulators highlight the importance of setting targets throughout the industry for boards, executive teams, wider senior management and also for customer-facing staff.
“We believe that targets for representation can be a powerful way of driving change through commitment to shared goals,” they said.
“We would want to avoid this becoming a tick box compliance exercise. Any such target‑setting would need to take account of the wider cultural context of the firm and firms would need to be able to explain the actions taken to meet any targets.”
Specifically on customer-facing roles the paper added that greater diversity may help in understanding and serving diverse consumers and asked for views on the use of targets here, especially certified staff, and the firm as a whole.
Along with considering increased diversity on boards and mandating areas of responsibility for diversity and inclusion at board level, the regulators want individuals to be responsible.
“We think that making senior leaders directly accountable for diversity and inclusion in their firms would be a way to drive strategic thinking and relevant discussions among the key decision‑makers,” the paper said.
“This focus from the top would help to empower individuals from across the firm to embed diversity and inclusion into the entirety of a firm’s practices.”
‘Will not hesitate to take action’
In the foreword to the paper FCA chief executive Nikhil Rathi, BoE deputy governor for financial stability Jon Cunliffe and PRA chief executive Sam Woods laid bare the importance of the situation.
“It is clear that we still have a very long way to go,” they said.
“Large gender and ethnicity pay gaps still exist in the financial sector, there are parts of the industry which lack diversity at senior levels, and the products offered to customers still do not always meet the needs of disadvantaged groups.
“In addition, staff at both firms and regulators do not often have the vocabulary or skills to conduct open and constructive conversations about sensitive subjects such as race.”
They noted that diversity and inclusion were critical to their work on culture and governance, particularly for boards and senior management and that they expected to see diversity and inclusion become part of how they regulate and part of how the UK financial sector does business.
“We will recognise those firms that make good progress and will not hesitate to take action where we see shortcomings, particularly where those impact on consumers and market outcomes. By working together on these issues we think we can drive real change,” they concluded.