The Financial Conduct Authority has set out proposals to boost diversity and inclusion across the financial services industry.
In a consultation paper published today (September 25), the FCA with the Prudential Regulation Authority (PRA) outlined measures to support healthy work cultures, reduce groupthink and unlock talent.
As part of the proposals, the FCA said all FSMA firms with a part 4A permission, excluding limited scope SM&CR firms, would be required to report employee numbers to the regulator annually on RegData so it can determine who is in scope of the additional requirements.
It proposes applying a minimum standard to all FSMA firms with a part 4A permission with the aim of reducing discrimination and misconduct.
The FCA will also introduce additional requirements for firms with 251 or more employees such as setting targets and strengthening disclosure.
The FCA said it would expect firms to set at least one target for each of the board, its senior leadership, and the employee population as a whole.
“Our multi-firm review found that existing initiatives to address underrepresentation focus primarily on senior leadership,” it wrote.
“Yet our analysis of firms’ diversity data showed that the sharpest drops in gender and ethnic diversity occurred in the step from junior to mid-level roles, a finding that is consistent with research by the FSCB.
“This highlights the importance of firms setting targets across the employee population, in addition to senior levels.”
The FCA said firms may want to prioritise areas of greater underrepresentation in the short to medium term so they can make more rapid progress on increasing diversity.
Firms may also use their own employee networks to help identify areas of weakness.
“We propose that firms are required to consider the context in which they operate by having regard to available data on the diversity profiles of the UK population and the geographical area in which they carry out regulated activities,” it said.”
The regulator has not set out how frequently firms must update their targets as it recognises that progress may take several years.
Firms would instead need to review and update their targets regularly to ensure that they remain stretching but realistic. The firm’s board would oversee the targets set.
Nikhil Rathi, chief executive at the FCA, said: “For UK financial services to be competitive and for the companies in it to be well run with healthy work environments, its 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.”
Meanwhile, the FCA has proposed that the firms publicly disclose their targets and their progress towards them annually in order to promote transparency and allow firms and other interested stakeholders to benchmark progress.
Additionally, requirements for large firms will include annually collecting and reporting to the regulators in numerical figures, explaining the reasons for any gaps and how they will be closed and reporting data to the FCA and PRA using a single data return on the RegData platform.
Firm thresholds are set at 250 employees, therefore a firm with 251 or more employees will be a large firm for the purposes of the proposed additional requirements.
“We selected the 251 or more employee metric as it is a long-standing, widely used and simple threshold,” the FCA said.
“Businesses of this size are already liable to report employee data under the government’s Gender Pay Gap regulations.”
To reduce the regulatory burden of firms moving in and out of scope of the additional requirements, the FCA proposed relying on the average number of employees over a rolling 3-year period as at a specified annual reference date.
Where a firm has been authorised for less than a year at the specified reference date, it should use the number of employees at the date of authorisation.
Rathi added: “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.”
Cost benefit analysis
The FCA estimates there are 45,122 FSMA firms with a part 4A permission.
The FCA said: “We estimate average (mean) costs per firm for small and large firms based on the methodology described.
“As our survey data suggests that costs scale with size and as some requirements only apply to large firms, we use estimated average cost per firm figures for small and large firms.”
"We expect the following benefits: higher standards of conduct; improved decision making and risk management including through more effective challenge; helping to make the UK market a more attractive place to work and do business; and products that can cater for a diverse consumer base through more innovation and competition," the FCA added.
Priti Verma, chief risk officer at Quilter, said the consultation sends a clear message that it is high time that diversity is taken seriously in financial services and that poor office behaviours can no longer be tolerated.
She explained that the financial services sector needs to go much further to "break down perceptions that it’s a ‘boys’ club’", as it is this that directly prevents women and girls viewing financial services as a potential career.
“The regulator’s intervention is a timely reminder us all about how important diversity at the very top is in setting a healthy corporate culture, where people are free to speak. And that includes diversity in general – not just gender diversity," she said.
“But protecting people’s rights and making them feel like they belong in a workplace should be just the bare minimum. Greater diversity should be part of company strategy and recognised as a non-financial risk. Getting it right can help improve both business performance and investment returns.
"More diversity on boards means more varied perspectives and experiences, which allows for more effective decisions to be made, and group think to be challenged.
Lorraine Johnston, financial regulatory partner at law firm Ashurst, added: "From the regulators' point of view, not enough progress has been made on D&I in financial services firms. The FCA in particular has also linked proposals around non-financial misconduct as part of this wider consultation, which isn't accidental.
"Firms need to take these papers seriously and think carefully around what gaps there might be in their own governance and processes and where the regulators want them to be."
sonia.rach@ft.com
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