While company culture has been a primary focus for the past few years, the FCA will now be turning its attention to the issue of diversity and inclusion in financial services.
The plan was prefaced by the publication of its recent discussion paper, written in collaboration with the Prudential Regulation Authority and Bank of England.
In it, the regulators expressed concerns over the rate of progress being made towards meaningful representation and equality in the industry, citing such issues as ethnicity and gender pay gaps as evidence of significant work still needing to be done.
These recent releases have all been remarkably unified in their message: businesses will be expected to do more, and more quickly, to improve diversity within their workforces going forward.
So, what is the thinking behind this shift in priorities?
Why D&I and why now?
While moving towards more diverse representation has been on the corporate agenda for years now, critics have occasionally noted that efforts have largely had a singular focus on gender disparity through initiatives like the Women in Finance Charter.
And despite the widespread attention it has received, progress towards better gender equality has proven dishearteningly slow, with one 2020 report indicating the pay gap within the sector had actually widened from 22.2 per cent to 23.1 per cent over the previous two years.
But beyond the gender debate, the tumultuous past 18 months have undoubtedly served as a reminder that there are other important aspects of D&I.
Following the Covid-19 pandemic that has financially impacted some groups more than others, as well as the global conversations surrounding racial equity brought on by the murder of George Floyd last May, regulators and businesses alike have been increasingly looking inward at whether their structures and processes are exacerbating disadvantage.
And the FCA is no different, publicly committing to doing more and laying out its expectation that businesses should be working to improve diversity more quickly, with a particular focus on intersectionality.
What do we mean by D&I?
It goes without saying that there are a whole host of immutable characteristics that combine to make each of us unique and diverse, ranging from the outwardly visible, gender, age and ethnicity being obvious examples, to those that are less so, such as sexual orientation, disability or socio-economic background.
In their recent paper, the regulators discuss the protected characteristics within the framework of the Equality Act 2010, as well as socio-economic background, as areas that companies need to be focusing on.
It is notable that their definition of ‘diversity’ refers to diversity of thought – that is, recognising and valuing a range of different backgrounds and experiences that lead to different viewpoints. By defining diversity in this way, it is clear that the regulators are not prioritising any one characteristic over another, instead aiming for a more holistic approach that serves to move the dial forwards across all areas.
While the focus may have shifted towards D&I, this re-alignment of priorities arguably makes culture change even more important. Ultimately, the end goal is to promote a shift towards healthy cultures that are diverse and inclusive.
What’s more, coming hot on the heels of the Senior Managers and Certification Regime's push for accountability and the advent of the new consumer duty, this initiative marks the latest in a series of policy changes that act as a catalyst to help companies drive deeper cultural transformation from within.
What can we expect moving forward?
Given that the pace of change has been disappointingly slow, the publication of this paper can be seen as a reboot, and re-assertion, of the regulators’ push for meaningful change.
A number of actions are being considered to kick start the next phase. These range from new regulatory reporting requirements on employee diversity data, to policy options focused on ‘tone from the top’, as well as other company-wide policy and procedures.
Having said that, the FCA is also well aware of the drawbacks of regulatory overload, with much of its Transforming Culture initiative stressing the importance of supervision and company-led change over hard-and-fast rules when dealing with organisational culture. The regulator has historically been reluctant to prescribe a boilerplate strategy for all businesses, instead wanting to encourage organisations to find a culture that fits their own purpose and business strategy.
And then there is always the unintended consequences any regulatory intervention could bring, which the FCA and companies alike would ideally like to avoid – for instance, delayed action due to waiting for a final regulatory view.
So, is it possible to solve the diversity equation without formal regulatory intervention?
So far, the results have not only been below expectations, but the efforts themselves have often been too one-dimensional and narrowly focused. And this lack of meaningful company-led change appears to have left the regulators with no other option but to intervene.
The balance between encouragement and enforcement
The main question for the FCA to wrestle with now is: how effective could any new rules feasibly be in driving the progress that is so clearly required?
While new impetus of some kind is clearly warranted, it is equally the case that a wave of new standards could quickly become yet another box-ticking exercise that fails to address root causes. And the last thing businesses need is more hoops for compliance departments to jump through that only serve to distract from meaningful grassroots change and fail to engage the wider business.
If nothing else, regulatory intervention prompts attention and focus, alerting companies to the areas where change is needed. But unless it is accompanied by a fundamental culture shift within each organisation – a step that needs to be initiated voluntarily to have optimal effect – change is unlikely to be truly impactful or sustainable.
This ultimately means the regulators can only do so much, and it is up to businesses themselves to take the reins.
The FCA and its partners have made it clear they are willing to take on the challenge and use all the tools available to them to champion greater inclusion – it is time for businesses to do the same.
Olivia Fahy is head of culture at compliance consultancy TCC Group
