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Diversity and inclusion in the financial sector – working together to drive change

On 7 July 2021, the UK regulators published a joint discussion paper setting out policy options to drive diversity and inclusion in financial services. In this wide-ranging and significant paper the regulators expressly state that they will be embedding Diversity and Inclusion (D&I) into existing supervisory practices. The FCA will be using responses from this discussion paper, along with ongoing conversations with industry and stakeholders, to refine their supervisory approach to more clearly take account of D&I. Firms should take note and consider how they are placed to navigate this new landscape.

In this article we summarise key considerations for firms and, below, reflect on practical next steps:

1. Leadership and culture

Regulators expect leaders at all levels of a firm to play a pivotal role driving the culture of a firm. Senior leaders should foster an inclusive culture and a psychologically safe environment where staff can speak up and their diverse contributions are valued. Boards are expected to monitor and challenge progress on D&I both in the firm’s construct and in the way it does business. Boards themselves should be representative with a diverse succession pipeline.

2. Remuneration

Firms should link D&I to the personal objectives of Senior Management. Firms should develop frameworks and metrics linked to advancing D&I when setting variable remuneration awards. Firms are encouraged to monitor and evaluate progress and to collect qualitative and quantitative data for performance management purposes. The paper also sets out regulatory expectations for remuneration committees to have oversight of how obstacles that give rise to pay gaps and other adverse D&I outcomes are managed.

3. Firm wide policies and practices

3.1 Firms should review their D&I policies forming the foundation of the firm’s strategy. It should also communicate expectations on staff, objectives and what good looks like.

3.2 Firms need to address the issue of attrition of diverse employees before they reach senior management, or failure to promote diverse candidates.

3.3 The regulators are considering setting quantitative or qualitative targets for under-represented groups. Regulators are also considering requiring firms to disclose publicly a selection of aggregated diversity data.

4. Training

4.1 From our experience, Senior Managers benefit from training on diversity and inclusion issues as well as training on how to foster a psychologically safe environment where sensitive issues may be discussed. Firms should explore scenario-based training, as opposed to theory-based training, to bring to life the firm’s D&I strategy. 

4.2 ESG issues are increasingly rising to the top of the agenda for investors and society. There is evidence that firm cultures that are inclusive and receptive to employees are likely to generate better judgements, reduce the risk of groupthink, and therefore be more sustainable and resilient.

5. Regulatory measures

5.1 The paper suggests that regulators are exploring whether adverse findings in relation to individuals’ conduct with regard to D&I issues could affect the regulators’ assessment of fitness and propriety in the future. FCA guidance may follow as to how such behaviour or failure to take reasonable steps to address these kinds of behaviours could result in a breach of the Conduct Rules.

5.2 Where regulators have concerns that a proposed Senior Manager or Board appointment would worsen or not address risks arising from a lack of diversity and prevalence of groupthink they will consider whether this comprises grounds for withholding approval.

How should boards and senior leaders respond?

With these considerations in mind Board and Senior Leaders should start thinking and take action on the following:

  1. Develop frameworks for diversity data collection and disclosure
  2. Consider how succession planning could support better diversity and inclusion outcomes
  3. Review the role of the remuneration committee in overseeing and managing obstacles that give rise to adverse D&I outcomes

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A&O Consulting is a specialist strategic and regulatory consulting practice. We have extensive experience of advising clients in relation to governance, culture and conduct initiatives within financial services organisations and meeting the demands of local regulators. We take a proportionate and pragmatic approach and our advice can be helpful with all areas of conflicts outlined above. We can help ensure current mechanisms and controls are fit for purpose, particularly in our current working environment. We can also advise on how the current remote environment could change the nature and challenges around diversity and inclusion and how best to manage this.

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