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Culture: Why regulators should care about diversity and inclusion

FCA | Nikhil Rathi | March 17, 2021

inclusion and diversity are regulatory issues - Culture:  Why regulators should care about diversity and inclusion

Speech by our CEO, Nikhil Rathi, at the launch of the HM Treasury Women in Finance Charter Annual Review.

  • The charter, which challenges the financial services industry to do better, is making a difference.
  • Diversity will be crucial in our consideration of vulnerability, particularly as we come out of a pandemic that has disproportionately affected women and people of colour.
  • We are working with the Prudential Regulation Authority on a joint approach to D&I for all financial services firms.
  • We will increasingly be asking tough questions firms about representation across grades and whether their culture is open and inclusive and provides a safe space for colleagues at all levels of the organisation.
  • As part of our regulatory work on diversity and inclusion and the listings framework, we will be exploring whether we should make diversity requirements part of our premium listing rules.

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Diversity is a broad topic covering a range of characteristics – gender, ethnicity, sexual orientation, disability and, increasingly, the social background of our colleagues. Today, while we focus on gender equality, I want also to consider how this intersects with other protected characteristics, primarily ethnicity, and why we care about these issues not just as an employer and an exemplar for industry, but as a regulator, too.

When Jayne-Anne Gadhia published her 2016 review on women in financial services, she found they represented only 14% of executive committee members. Women either did not progress or they left the sector. And they left, not just because of childcare, but because the culture wasn’t right.

Harriett Baldwin, then Minister responsible, remarked upon the Charter’s launch that too little had changed during her 30 years in banking. And, while attitudes are shifting, women still receive 28% less pay than men and account for only 17% of those approved by the FCA – generally speaking, the most senior people in financial services.

This Charter is making a difference. 62% of signatories have seen an improvement in female representation in senior management. But, even among those signatories, women represent less than a third of senior management.

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That matters to a regulator. Research has suggested that greater gender diversity improves risk management culture and decreased the frequency of European banks’ misconduct fines.

Why we, as a regulator, care

The evidence tells us there is a strong business case for diversity. According to McKinsey research,

the most diverse companies, for example, are 35% more likely to outperform the least diverse.

And there is no shortage of wider issues to address. Fewer than 1 in 10 management roles in financial services are held by black, Asian or minority ethnic people. The Parker Review reported that there were only 80 directors of colour in the FTSE250 - 5% of the total. And where there are directors of colour they tend to be concentrated in a small number of firms and few hold the positions of CEO or Chair. The number of women of colour in senior positions in financial services is a particular concern.

This lack of diversity at the top raises questions about firms’ ability to understand the different communities they serve, and their different needs.

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Our Financial Lives research shows black, Asian and minority ethnic adults are disproportionately represented among the growing number of vulnerable consumers – and so at greater risk of financial harm.

Holding firms to account

As part of our work on wholesale banking culture, we introduced 5 conduct questions to help focus minds of senior managers on conduct risk. I would like to see this expanded – and a sixth added – for all firms:

is your management team diverse enough to provide adequate challenge and do you create the right environment in which people of all backgrounds can speak up?

This is much broader than representation. It is about a firm’s culture. Not just in relation to diversity, but inclusion, too. Do people feel comfortable in the work environment such that they can demonstrate, share and bring to bear their diversity of experience and background?

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