In the past few days, both Nikhil Rathi (the CEO of the UK’s conduct regulator, the Financial Conduct Authority (FCA)) and Georgina Philippou (Senior Adviser to the FCA on the Public Sector Equality Duty) have delivered important speeches on diversity and inclusion (D&I) in financial services. The title of Nikhil Rathi’s speech – “Why D&I are regulatory issues” – indicates in no uncertain terms the FCA’s direction of travel on this issue: a failure to ensure a diverse workforce and an inclusive culture will be regarded by the FCA as a regulatory failure. D&I is becoming an increasing area of focus for the UK regulators and is likely to become so for regulators globally, including across Europe.
The lack of diversity in the UK financial services industry is well-documented and both speeches cited examples to emphasise the point: women account for only 17% of senior managers approved by the FCA, fewer than 10% of management roles in financial services are held by those of BAME backgrounds and only 11% of investment management firms have a female CEO or chair. Georgina Philippou also stressed the importance of an inclusive culture which enables employees “to bring their whole selves to work”, without which, in her words, the value of diversity “will be lost”.
Why D&I matters to the FCA
As Georgina Philippou noted explicitly, the FCA Handbook does not contain specific D&I provisions. On what basis, then, does the FCA view D&I as an area of regulatory concern?
For Nikhil Rathi, the answer lies in the FCA’s growing focus on vulnerable customers. A growing body of evidence, including the FCA’s own research, has found that BAME adults are disproportionately represented among the growing number of vulnerable consumers. It follows, argues Rathi, that firms are unlikely to be able to respond adequately to the needs of these consumers if they “do not have the diversity of background and experience required to overcome biases and blind spots”. In Rathi’s view, customer outcomes, particularly for vulnerable customers, are therefore at risk if firms are insufficiently diverse and inclusive.
Georgina Philippou offers a slightly different analysis. She instead argues that D&I is at the core of a wide range of FCA competencies (such as culture and treating customers fairly) and that, as a public body subject to the Public Sector Equality Duty, the FCA is obliged to encourage diversity and inclusion in carrying out its broader supervisory function.
The FCA’s position is therefore clear: D&I issues fall squarely within its remit.
FCA’s supervisory approach to D&I
Firms could be forgiven for wondering, in the absence of explicit Handbook rules, precisely how the FCA intends to approach D&I issues. The recent speeches were relatively light on detail, but it is clear that the FCA intends to be increasingly muscular in its approach to firms considered insufficiently diverse or inclusive. In particular:
- Nikhil Rathi suggested that management teams should be actively considering, as part of their ongoing conduct risk analysis, whether they are sufficiently diverse and inclusive to provide adequate challenge in an environment where everyone feels they can speak up.
- Both speakers indicated that the FCA is considering whether diversity of management teams should become part of its assessment of SMF applications, creating, in effect, a minimum diversity standard for management teams at regulated firms.
- The premium listing rules may similarly be amended to ensure a minimum number of board directors at premium listed companies are from under-represented backgrounds.
Although not stated explicitly, it is possible that the FCA may consider D&I as part of its supervisory activity in other areas. For instance, if a firm is being investigated for failing to treat customers fairly by adopting a new policy that disproportionately adversely affects vulnerable customers, the FCA may seek information about the diversity of senior management responsible for the policy and whether a robust impact assessment was undertaken. This illustrates the potentially wide ambit of the FCA’s supervisory approach to D&I.
While the details of the FCA’s approach to D&I are not yet final, the contours of its position are clear; firms should therefore continue to prioritise making their workplaces diverse and inclusive environments.
A failure to ensure a diverse workforce and an inclusive culture will be regarded by the FCA as a regulatory failure.