Out-Law News 3 min. read

UK regulators promote diversity and inclusion in financial services firms

The UK’s Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA) and Bank of England are asking for views on plans to improve diversity and inclusion in the financial services sector.

According to a new discussion paper (57 page / 829KB PDF), potential changes that could be introduced include the use of representation targets, measures to make senior leaders directly accountable for diversity and inclusion and linking remuneration to diversity and inclusion metrics.

Possible measures that could help drive better diversity and inclusion outcomes could include explicit mention in regulatory rules for firms to consider board diversity in succession planning, and to consider upcoming appointments in the context of diverse representation.

The discussion paper said good data and ongoing monitoring would be essential and the possibility for a diversity and inclusion policy is being explored as a requirement for all firms. Although the regulators are aware of the need for proportionality and said they did not intend to be prescriptive about the content of such policies , at a minimum the policies should promote board diversity.

The regulators said diversity and inclusion are critical to their culture and governance work.

For the FCA diversity and inclusivity is also rooted in their work on the treatment of customers and for the Bank of England and PRA the key consideration is the link between insufficient diversity and inclusion with groupthink, as they say that can be a safety and soundness risk for firms. The regulators believe more diverse, inclusive firms will benefit from better risk management, as individuals feel empowered to have open discussions without fear of having their views shut down.

The regulatory goal is increased diversity and inclusion in financial services firms, to make safer and sounder firms, improving governance, decision-making and risk management, so as to create a more innovative industry, and products and services better suited to consumers’ diverse needs.

Financial services regulation expert Jonathan Cavill of Pinsent Masons, the law firm behind Out-Law, said: “The discussion paper very much continues the FCA’s ‘mood music’ on market protection, stability and customer outcomes which the FCA has driven forward in recent years – particularly as more recently seen in its vulnerable customer guidance and consultation on the proposed duty of care.”

Cavill said the paper highlighted that retail customers could be at risk of harm if firms were unable to understand and meet the needs of their diverse customer base.

“As a consequence, and as highlighted in the paper, consumers can be at risk from a range of poor outcomes, from buying a financial product or service that quite simply isn’t right for them, through to becoming disengaged from or even excluded from the market entirely,” Cavill said. “Given the FCA has the strategic objective to ensure relevant markets work well, and an operational objective to secure an appropriate degree of protection for consumers, diversity and inclusivity could flow into areas with the potential to help address such consumer risks.”

“Whether this is by taking on board a wider range of views on a given market’s needs and possible use cases for its products and services in the firm’s design and build stage, or in revisiting the firm’s approach to communications and access to them, be that in terms of actual content, the medium - or both,” he said.

Increasing diversity and inclusive decision taking at all levels throughout the business, not just at the most senior level, could give the firm new insights into its customer base, according to Cavill. “Potentially this opens a broader perspective on the firm’s customers with the potential for innovation in a range of relevant areas – such as staff training and customer service for instance, or for products and services that better reflect and meet customer needs. All of this will be increasingly relevant to firms, given the FCA’s proposal for a new consumer duty,” he said.

The paper emphasises the role of senior managers in diversity and inclusion and suggests senior managers such as board chairs and chief executives could be made directly accountable for diversity and inclusion within their firms.

Employment law expert Anne Sammon of Pinsent Masons said irrespective of whether that proposal materialised, firms should be considering whether their current senior managers had sufficient understanding and knowledge of diversity and inclusion issues to be able to properly consider these issues or whether a programme of upskilling was required.

According to Sammon the possibility that the regulators would scrutinise senior managers’ appointments from a diversity and inclusion perspective, and potentially withhold approval for the appointment of a non-diverse candidate, could be of concern to firms in particular sub-sectors “because  identifying diverse senior manager function candidates can be challenging due to historic issues, resulting in fewer diverse candidates being in the talent pipeline”, Sammon said.

“Interestingly, there is also the suggestion that the regulatory rules could expressly state that a firm’s remuneration policy should ensure that all types of remuneration do not give rise to discriminatory practices. If such a rule were to exist, firms might have to more robustly consider the impact of their remuneration policies and whether any equal pay or discrimination pay claims or grievances suggest that they have failed to comply with regulatory obligations,” Sammon said.

The possibility of new guidance as to what constitutes “non-financial misconduct” in the context of applying the fit and proper test for senior managers, and also when considering potential breaches of the Conduct Rules, could be welcomed by industry.

“This is an area that is often difficult for firms, particularly given the implications of such findings for the individual concerned,” Sammon said.

The regulators said they intended to launch a pilot data study later this year, in order to gain a better understanding of current levels of diversity within firms, to understand the data currently collected, and understand plans to collect diversity and inclusion data in the future.

“While this will be a voluntary survey, firms will want to consider the impact of refusing to participate – for example, employees may feel that this suggests a lack of commitment to these issues,” Sammon said.

The regulators are seeking comment on the discussion paper by 30 September 2021.


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