Financial services nudging the diversity agenda
04 August 2020
Culture, culture, culture
The impact on business as usual has been felt by all sectors in one way or another. But for those in financial services, the Financial Conduct Authority has made it clear that there will be no downgrading of its regulatory expectations in relation to culture. As far as the FCA is concerned, and its approach to supervision underpins this, the culture of a firm drives behaviours; both good and bad. The Regulator is keen to communicate that it would be imprudent to deprioritise the focus on culture while resources are being redirected to the immediate risks posed by Covid-19. These uncertain times with new and untested ways of working make it all the more important to ensure that strong leadership is encouraging the right behaviours, which ultimately make firms more resilient and contribute to their long-term success.
This is the message from the FCA in its annual letter to Chairs of Remuneration Committees, in which it sets out its findings and observations from the 2019/20 remuneration round. What is interesting is that the FCA is pushing the diversity agenda with more than just a nudge. While recognition of diversity’s contribution is not something new for the Regulator as it was picked up in the same letter after the 2018/19 remuneration round, this year, the FCA is more prescriptive about what needs to be done in this space. And, unsurprisingly, there is specific mention of BAME inequalities.
The disproportionate impact of Covid-19 on particular sections of society is addressed by the FCA. It expects firms to be aware of the risks in relation to the profile of their workforce and suggests that they “can make a positive difference by proactively recognising particular issues that some of your people may face and aim to take action where possible”. On gender and BAME pay gaps, the FCA expects firms to consider the analysis from those reports and use them to address any inequalities.
Firms will be well aware of the FCA’s interest in non-financial misconduct over the past couple of years, and of course, in reality, it is misconduct that has a discriminatory element; be it harassment or other detrimental treatment in relation to protected characteristics. It is closely linked with diversity and inclusion because of its connection with protected and other characteristics. At first the focus was on gender and sexual harassment, and now has been expanded to cover race and ethnicity in the wake of #blacklivesmatter.
And if there was any doubt about the FCA’s expectations in relation to diversity, then look no further than the comments of the incoming Chief Executive of the FCA, Nikhil Rathi, who will be appointed this autumn. He told a Treasury select committee that if progress in this area is not made, then it may become a supervisory matter, and could even lead to appointments being blocked.
These are tough words from the first BAME individual appointed as the boss of the FCA. He clearly means business with diversity and inclusion, and will undoubtedly trailblaze the issue at every opportunity because of its close alliance with culture.
In preparation for what is to come, firms should ensure that:
- those individuals who regularly attend supervisory meetings with the FCA are familiar with their diversity statistics and initiatives to address any inequalities
- they can demonstrate how remuneration policies promote equality of opportunity, and how diversity and inclusion are embedded within the reward framework
- Senior Managers and Certified Persons have been trained in unconscious bias
- Senior Managers proactively engage with recruitment and promotion practices to ensure that progress is being made year-on-year on diversity and inclusion
- non-financial misconduct is captured in management information, and there are data metrics and trends on the impact on conduct rule breaches, adverse fitness and propriety findings, remuneration adjustment and reportable concerns
- targets are considered as one of the options to address inequalities
- Managers think carefully about whether there may be bias in any redundancy scoring particularly if they are using performance and they find that BAME colleagues have historically been more likely to be scored as under-performers than White colleagues. If bias has crept into performance reviews and if those reviews are influencing future decisions, there is a further discrimination risk
- consideration is taken into account that individuals of Black African or Black Caribbean and Asian ethnic groups may have the highest increased Covid-19 risk, which may make them more likely to continue to work remotely rather than form part of the first cohorts returning to the office. This creates the risk of a divisive culture, which firms need to think carefully about, and Managers may need to be educated to ensure that work opportunities are not just given to those with a physical presence as this risks alienating those working virtually.