While undoubted progress has been made to improve cultures in financial services firms in recent years, the industry still has some distance to travel on diversity and inclusion. Three recent FCA speeches provide some clarity about how the FCA expects firms to better their cultures.
Many people have not seen the inside of an office building for more than a year. It is only a handful of weeks until many of us begin that familiar journey again, leaving the house and starting our round trip from home to work and back again before the day is over.
The financial services sector started its own journey to transform culture several years ago. However, this was not a well-trodden path. There was a clear destination but no one was really quite sure how to get there. A multitude of publications were made by the FCA, from speeches to discussion papers to more formalised guidance. Firms started making proclamations and targets about culture and diversity. But that really was the train just leaving the station.
Now, the FCA is firing this particular locomotive. There has been a shift in language in recent speeches and it is clear that we are on the next leg of the journey.
Three recent speeches set out their direction of travel. Nikhil Rathi (CEO of the FCA) made a speech in March on why diversity and inclusion are regulatory issues, in the context of the successes of the HM Treasury Women in Finance Charter Annual Review to improve gender diversity in the financial services industry. Georgina Phillippou (Senior Adviser to the FCA on the Public Sector Equality Duty) gave two speeches in January and March on the relationship between the FCA and diversity and inclusion. They emphasised the following points.
The FCA’s role is multifaceted
The FCA’s vested interests in promoting diversity and inclusion are kaleidoscopic. The FCA is an employer, meaning it wants to be as diverse and inclusive as possible to reflect the communities in which it is placed and the consumers it protects. As a regulator, it wants to “move the dial” on culture in financial services. As a public body, it must reduce discrimination, further equality of opportunity and enhance relations between people who have protected characteristics and others who do not.
Each facet of the FCA’s role interacts with one another
Ms Phillippou refers to how a “virtuous chain of events” may be created by getting diversity and inclusion right. By achieving greater diversity and inclusion as an employer, it enables the FCA to have a better understanding of what it is that they are regulating, which influences policy and the day-to-day supervision of firms.
This, in turn, may lead to firms designing their products and services in a way that is more inclusive, encouraging a more diverse populace to engage with these products and services (which touches on the FCA’s public sector duty).
From “diversity” to “diversity and inclusion”
Much of the early focus of the cultural shift over the last few years appeared to be about creating a diverse workforce. However, diversity is superfluous without ensuring the inclusion of different minds in decision-making processes. Not finding the right balance may lead to gaps when it comes to firms considering issues that touch their consumers. Therefore, inclusion is imperative going forward.
As Ms Phillippou says: “It is the responsibility of us all… to create and maintain cultures which embody diversity and inclusion.” Firms need not only to encourage people to “speak up”, but to “listen up” to those with a voice. Provided people feel psychologically safe to express their view, this is more likely to harness the cultural ideal that the FCA is pushing for. To support this, Ms Phillippou refers to a number of studies that conclude that there is a business case for diversity and inclusion.
One size does not fit all
It is unlikely that we will see a strict regulatory standard on what firms must do on diversity and inclusion, as the FCA “cannot prescribe what any firm’s culture should be”.
Despite this, Mr Rathi said that the FCA and PRA are working on a joint approach to diversity and inclusion for financial services firms. Diversity and inclusion will influence how the FCA regulates firms in different areas and it is through this medium that firms will have to take stock of whether their approach to certain issues has sufficient considerations around diversity and inclusion. For example, Ms Phillippou reels off in her speech certain areas where diversity and inclusion considerations play a part, such as: “integrity… treating customers fairly… pricing structures… marketing… ESG strategies.” As you can see, the scope of diversity and inclusion quickly becomes all-encompassing.
Senior managers must give greater focus to conduct risk
Mr Rathi would like to see a further question added to the “5 conduct questions” published each year, which asks firms about the diversity of their management team and whether this enables adequate challenge and empowers people from all backgrounds to speak up.
As stated above, Ms Phillippou suggests that the FCA cannot prescribe firms’ cultures. However, there is a slightly veiled threat in Mr Rathi’s speech that: “If we don’t see improvements in diversity at senior levels and better answers, we will also consider how to best use our powers.” This should serve to refocus senior managers’ minds on the importance of this issue, especially with the backdrop that Mr Rathi states that the FCA is considering whether to require certain levels of diversity amongst company directors as part of its premium listing rules.
It is not difficult to imagine diversity playing a part in the FCA’s scrutiny of how firms manage and organise themselves in years to come and potentially being identified as a root cause of misconduct or poor customer outcomes that are identified in the industry.
Are we there yet?
No. However, it is clear that steps are being taken to address cultural issues within the financial services sector. These speeches may be viewed best as a continuation of the broader conversation that the financial services industry (and indeed wider society) has been having about culture, diversity and inclusion.
At the outset of this post, I suggested that, when this particular FCA train left the station, we all knew where it wanted to go: to see an improvement of culture within firms, which led to better outcomes for consumers. However, it did seem a little opaque as to what the expectations were on firms to get there. Ms Phillippou herself acknowledges that “culture” alone “seems far too nebulous a concept to get your arms around”. However, we are starting to see clarity of thinking from the FCA on what the ideal of “culture” may look like and how diversity and inclusion are two tenets of this. We are also seeing encouraging signs that steps that the FCA and the wider industry have taken to date are achieving a degree of success (e.g. with the HM Treasury Women in Finance Charter). However, we are not there yet.
These speeches should provide firms with some further clarity about how the FCA expects them to better their cultures and tackle the challenges that they may face in doing so. The FCA seems to have given firms just the ticket they needed to continue pushing ahead when it comes to culture, diversity and inclusion.