Addleshaw Goddard

Legal News | 14/10/21

Diversity is by its nature diverse. When the Financial Conduct Authority
(FCA) talks about diversity in financial services firms, it is referring to a broad range of backgrounds and characteristics which apply to a firms’ work force and leadership, as well as the customers it serves. Through several speeches and papers published over the last year or so, the FCA has clearly indicated that diversity and inclusion are priority considerations and will remain so in the coming years.

The FCA has been sending strong messages around diversity and inclusion for several years, perhaps most significant in recent months are Nikhil Rathi’s speech in March 2021 and the discussion paper, DP 21/2, published jointly by the FCA, Prudential Regulation Authority and Bank of England.

In his speech, Mr Rathi noted the value delivered by having diverse leadership teams and workforces, which, when supported by an inclusive culture, lead to people being able to speak out and challenge “group think”. Empowering people with diverse characteristics and background not only ensures a better working environment, but also enable more effective identification of the needs of customers as well as effective mitigation of risk. These messages were repeated in the regulators’ joint discussion paper DP 21/2. The purpose of the paper is to help regulators understand how they can push the rate
of change and improvement in forms around diversity and inclusion.

The issues breakdown into distinct areas of interest:

Driving better customer outcomes: The regulators are clear that understanding the diverse needs of consumers using a firm’s services will better enable that firm to deliver fair and appropriate financial services. Key to this is ensuring products meet customers’ needs, perform as expected, including in times of stress, and deliver fair value.

Composition of the workforce: Having a diverse workforce which reflects a firm’s target market better enables it to understand customer perspectives and needs. Culture and inclusion: Providing a culture of psychological safety in which people can feel able to speak up and present differing perspectives help to avoid “group think” where a dominant, and potentially harmful, view is reinforced.

Leadership: Diversity at board and senior manager level should be pursued with the aim not only of delivering all the positive outcomes referred to above, but also as a means of better managing risk and promoting business success.

The regulators are only seeking views on how it might accelerate change at this stage. However, there is a consistency emerging in terms of the areas of regulatory focus. Taking those into account it seems appropriate to:

Review your products: Who are your target customers? What are their needs? Are you confident your product is reaching those customers and meeting their needs?

How diverse is your workforce? How do your HR and recruitment policies promote the cultivation of diversity? How are you tracking progress in representation and advancement in your business?

Leadership: Is your firm’s leadership diverse? Does it reflect your customer base? Does it understand the needs and imperatives of your target demographic?

Culture: Do you have policies, procedures and training which generate a sense of psychological safety amongst your workforce? Are people able to speak out, challenge the status quo and present divergent ideas?

Whist it may be sometime before the results of the discussion paper emerge and action is taken by the regulators, the FCA is actively working on its Consumer Duty. Draft rules are expected by the end of the year and the relevance of the issues raised by its diversity and inclusion work clearly overlap with the Consumer Duty. It may well be that the Duty will be used as a way of accelerating this agenda and firms would be well advised to use it as an opportunity to drive forwards their own diversity and inclusion agenda.