FCA chief executive Nikhil Rathi has called on firms to take action on tackling diversity concerns, labelling it a “regulatory issue”.
Earlier today, a new report was released from the Treasury on its Women in Finance Charter Annual Review 2021.
In a speech at the launch of the review, Rathi discussed why diversity and inclusion are important not just from a social perspective, but from a regulatory one too.
He began by referring to the 2016 review on women in financial services which revealed that women only represented 14 per cent of executive members. It found that women either did not progress or they left the sector, and those that left was not just down to childcare, but because the culture was not right.
“Diversity is a broad topic covering a range of characteristics – gender, ethnicity, sexuality, disability and, increasingly, the social background of our colleagues,” he said.
“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.”
In general, those approved by the FCA are usually the most senior individuals in financial services. Rathi said that while attitudes are shifting, women still receive 28 per cent less pay than men and only account for 17 per cent of those approved by the FCA.
Although the charter is making a difference with 62 per cent of signatories having seen an improvement in female representation in senior management, even among those signatories, women still only represent less than a third of senior management.
“That matters to a regulator,” he said. “Research has suggested that greater gender diversity improves risk management culture and decreased the frequency of European banks’ misconduct fines.
“This charter challenges regulators and firms to publish measurable targets and actions.”
The FCA is attempting to lead by example having set ambitious targets which includes women accounting for 45 per cent of its senior leadership team by 2020, and half by 2025.
But the regulator missed its 2020 target by 5 per cent, to which Rathi said “it shows we too have work to do”.
Not just about gender
Last month, the regulator made four appointments to its executive team, all of whom were women. These latest appointments mean 10 of the 19 people on the FCA’s board are women.
Discussing why it is now a regulatory concern, Rathi referred to research by McKinsey which outlined that the most diverse companies are 35 per cent more likely to outperform the least diverse.
Other research by Randstad found that 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 per cent of the total.
Rathi said: “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.”
He referenced the FCA’s recent Financial Lives research which found that black, Asian and minority ethnic adults are disproportionately represented among the growing number of vulnerable consumers.
Rathi added: “In our recent guidance on vulnerability, we said that firms – all firms – needed to understand the needs of their customers and be able to respond to them through product design, flexible consumer service and communications.
“I would question if any firm can adequately respond to the needs of these consumers if they do not have the diversity of background and experience required to overcome biases and blind spots.”
Holding firms to account
In the speech, Rathi explained that improving diversity and inclusion is both a matter of fairness and a crucial way to strengthen consumer outcomes, and the regulator would be holding firms to account.
“As part of our work on wholesale banking culture, we introduced five 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?”
He explained that if there are not improvements in diversity at senior levels in the years ahead, the regulator will “consider how to best use our powers”.
Rathi pointed out the the FCA as a public body is still subject to the Public Sector Equality Duty.
It is working with the Prudential Regulation Authority to formalise its regulatory approach to diversity and inclusion under that duty and plans to make its expectations clear.
He added that this is something the FCA will look at over the next year, led by chief operating officer Georgina Philippou.
“As a regulator, we want the same from the firms we oversee and in the markets we regulate. Not because it is a social good – although, frankly, that should be enough.
“We care because diversity reduces conduct risk and those firms that fail to reflect society run the risk of poorly serving diverse communities. And, at that point, diversity and inclusion become regulatory issues.”
