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Senior managers’ obligations: diversity and inclusion in financial services

Author
Oliver Palmer

Associate

London

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08 November 2021

Diversity and inclusion proposals put forward by the FCA and PRA will impact on senior managers’ obligations. In this post, we focus on potential changes to board representation, individual accountability and senior managers’ liability.

In September, Sheldon Mills (Executive Director for Consumers and Competition at the FCA) put out a rallying cry for “leaders to look hard at their business”. That speech targeted investment managers, but it was a reminder of the Financial Conduct Authority's (FCA) and Prudential Regulation Authority's (PRA) intention to increase senior managers’ accountability for improving firm culture. We also consider this speech briefly in this post.

This drive stems from the FCA’s and PRA’s July 2021 Discussion Paper on “Diversity and inclusion in the financial sector” (please see our other posts on the paper from 21 July, 22 July and 27 July). The paper does not include proposals for a senior management function covering diversity and inclusion improvements, but it contains lots of other ideas that require implementation and will impact current senior managers.  

The proposed changes

Key proposals expected to impact senior managers are:

  • potential target-setting for representation on a firm’s board
  • modifications to individual accountability
  • senior managers’ liability in relation to non-financial misconduct

Hitting the (board composition) target

The regulators are considering representation targets at senior levels, particularly on boards. 

Many firms have already introduced gender targets. Some have also followed Nasdaq’s proposals on board composition targets for listed firms. The question is whether other protected characteristics or factors (eg socioeconomic backgrounds) should be considered when selecting candidates.

The purpose of this is to foster “diversity of thought”. The regulators define this as “bringing together a range of different styles of thinking among members of a group”. The idea is that “diversity of thought” will lead to better outcomes for customers and employees.

Other proposals relate to increasing the robustness of board succession plans and incorporating diversity and inclusion considerations within succession planning.

The FCA’s position, as set out in the Discussion Paper, is that individuals approved in the SMF13 function are responsible for ensuring that the nominations committee adequately considers diversity and inclusion in succession planning. With this in mind, senior managers occupying this function should review and clarify their statements of responsibility, together with any relevant firm policies. They may also find themselves subject to increased regulatory scrutiny in future.

Individual accountability

The FCA wants to drive change by making senior managers directly accountable for diversity and inclusion in their firms.

This is most relevant to those performing the Chair of the Board or CEO roles. They tend to hold the relevant PRA-prescribed responsibilities to lead the development of the firm’s culture (PR (I) and PR (H)). For PRA regulated firms that do not adopt these prescribed responsibilities, there will be a “general responsibility” among relevant senior managers to implement the diversity and inclusion initiatives that arise from the Discussion Paper (and subsequent consultation). Also, for solo-regulated firms, the responsibility for “developing and embedding healthy cultures” will fall to all senior managers.

Senior managers should think about whether their reasonable steps frameworks remain appropriate. Do changes need to be made? Do documents need to be repapered? How can diversity and inclusion factors be woven into existing frameworks?

Whether or not the FCA chooses to take enforcement action against senior managers who fall short in this respect; such failures may result in compensation adjustments. One proposal in the Discussion Paper is to reflect the performance against an individual’s diversity and inclusion objectives in their variable remuneration.

Changes to senior managers’ liability for non-financial misconduct cases

Guidance may be developed on how the failure of senior managers to take reasonable steps to address non-financial misconduct could result in a Conduct Rule breach. While the purpose of this guidance is to promote consistency and reduce non-financial misconduct in the financial services sector, it remains unclear what practical impact it will have over and above the changes required by the other initiatives mentioned in the Discussion Paper.

A word on Sheldon Mills’ speech – a whole new world

The speech covered lots of old ground. This included describing the benefits of visible leadership and the responsibility for leaders to “nurture healthy cultures”. 

What was striking was the reference to culture in the “new normal” working environment and the expectations of the FCA for hybrid working. This is a topic we expect to consider in more detail in future blogs given the recent FCA statement on its expectations for firms operating remote or hybrid working. 

What is clear is the FCA’s expectation that senior individuals should instil the firm’s purposes and values in its remote/hybrid working practices. 

The speech was thought-provoking. How do you support new joiners and junior staff to learn the business, understand the firm’s ethos and collaborate with colleagues? What measures are needed to ensure effective oversight for remote and hybrid working arrangements? 

We have entered a whole new world and further change is on the horizon.

What’s next?

The FCA has clearly renewed and refreshed its focus on reforming the cultural issues it considers linger within the financial services industry. Whilst we can’t be sure that this will result in enforcement action for firms or individuals who fail to take reasonable steps to support this agenda, the proposals set out in the Discussion Paper and the constant reinforcement through speeches and other public statements suggest it is a possibility. Perhaps we will get a better indication of just how forceful the regulators intend to be when they publish their policy statement in Q3 2022.

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