The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have released a set of proposals that aim to boost diversity and inclusion (D&I) across financial services, in new consultation papers.
The FCA and PRA’s new proposed measures for diversity and inclusion hope to enhance the safety and soundness of regulated firms while improving understanding of diverse consumer needs. They explained that increased diversity and inclusion in regulated financial services firms can deliver better internal governance, decision making and risk management.
The proposals include new rules and guidance to make it clear that misconduct such as bullying and sexual harassment poses a risk to a healthy firm culture. This guidance looks to help ensure firms can take decisive and appropriate action against employees for such behaviour.
Recognising that each firm is different, the regulators will require each firm to create their own solutions. Many of the proposed requirements, including setting targets, regulatory reporting and disclosure, would only apply to the largest firms.
The consultation period will remain open until 18 December 2023, during which time the regulators welcome comments on the proposed approach taken – with feedback taken into account when finalising rules planned for publication in 2024.
An important step
Sam Woods, chief executive at PRA, also added: “Diversity and inclusion play an important role in guarding against groupthink within firms. Firms in which a broad range of perspectives is welcomed and encouraged will manage their risks better, advancing the PRA’s objective of safety and soundness.
“Stronger diversity and inclusiveness should also make firms more competitive by enabling them to attract a wider pool of talent. We are tabling proposals today which we think will advance our objectives, alongside existing core parts of our regime such as capital and liquidity requirements, and we welcome views on them from all stakeholders.”
Nikhil Rathi, chief executive of the FCA, explained the importance of new measures: “For UK financial services to be competitive and for the companies in it to be well run with healthy work environments, it’s vital they attract, retain and promote the best talent.
“The data suggests this isn’t happening. Our proposals will encourage the largest firms to put in place plans and report against their delivery. UK financial services has long been a magnet for best-in-class talent globally. Increasing levels of diversity within firms can help attract and unlock talent, supporting the sector’s international competitiveness.
“We have taken a lead among regulators in taking a clear stance that non-financial misconduct, such as sexual harassment, is misconduct for regulatory purposes.
“We’re strengthening our expectations on how the firms we regulate consider such misconduct when deciding whether someone is fit and proper to work within the industry.”
The illusion of inclusion
While existing efforts do exist, many have recognised a failure to truly embrace D&I practises beyond when hiring new employees. Myron Jobson, senior personal finance analyst at UK-based investment service interactive investor, explains: “While it is good to see diverse faces in high places, it is not a panacea to diversity and inclusion issues.
“Diversity without substance sells the illusion of inclusion. We have to move past hiring practices and authentically develop systems and cultures that allow people to flourish regardless of their background. Acquiring good data on diversity is essential to bring about and measure improvement.
“The financial industry has a huge role to play. The challenge is to proactively endeavour to understand how the status quo plays a role in producing unequal economic outcomes, how it directly contributes to wealth inequality and establish what needs to be done for a more inclusive financial system – a key enabler in reducing poverty and boosting prosperity.
“Many firms report GDPR and legal concerns as a barrier to collecting and holding data. As such, it is important that any new report D&I data framework will address and allay these fears. Data such as ethnicity, sexual orientation and disability are all considered sensitive according to GDPR, meaning the way the information is used or stored has stricter requirements compared to info on age and gender, the next challenge is building trust and encouraging employees to disclose the relevant information. Transparency around how the data will be used and why it is important to collate the information is necessary if employers want the best engagement from employees.”
“Other strands of diversity desperately need a turn in the spotlight”
Jobson also comments: “D&I initiatives are crucial in fostering more equitable and innovative solutions that lead to better problem solving, service and outcomes for everyone – including those in marginalised communities.
“When we talk about diversity, we’re not just talking about the usual suspects like race or gender, we’re diving into the deep end of the pool including ethnicity, religious belief, age ability, neurodiversity, sexual orientations and beyond. When people from diverse backgrounds and cognitive styles are involved, it reduces the risk of groupthink and ensures that various viewpoints are considered.
“The financial industry rightly shines a light on gender inequality, but other strands of diversity desperately need a turn in the spotlight,” he concludes.