Insights Archive - ZISHI

In September 2023 the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) published Consultation Papers following responses to their 2021 Discussion Paper, ‘Diversity and inclusion in the financial sector – working together to drive change’.

It’s clear that the FCA and PRA see the success of Diversity and Inclusion (D&I) within firms as critical to ensuring that consumers are not harmed, and that the UK financial sector is an attractive place to work and do business. They are seeking to achieve this by ensuring that all regulated firms and individuals meet their minimum standards and by assessing the drivers of behaviour that can create cultures likely to cause harm.

There are four key outcomes they are striving for:

  1. Healthy firm cultures
  2. Reducing groupthink
  3. Attracting and progressing new talent
  4. Better provision for diverse consumer needs

The proposed framework targets these outcomes by establishing minimum standards and giving firms a better understanding of regulatory expectations. They also hope that it could contribute to greater consistency and transparency on approaches to D&I across the sector, while higher quality data would allow them to better monitor progress.

Scope of Regulations

The proposals will apply differently to firms depending on their number of employees, categorisation under the Senior Managers & Certification Regime (SMCR) and whether they are dual regulated. To reduce regulatory burden, smaller firms with fewer than 251 employees would be exempt from some of the requirements, notably the collection and disclosure of diversity data and setting and tracking targets.

Diversity Data

The proposed set of mandatory data for reporting will encompass Age, Sex or Gender and disability or long-term health conditions. There are also voluntary metrics covering Sex or Gender (whichever firms don’t report within the mandatory metrics), gender identity, parental responsibilities, caring responsibilities, and Socio[1]economic background. Over time they expect to see increasing numbers of firms report on the voluntary metrics but are taking a proportionate approach initially.

Employees sharing their data is, of course, voluntary and firms will need to ensure they continue to build trust to encourage participation. Approaches to this can include publishing the data internally and demonstrating how it is being used to drive actions and improve diversity at all levels for the benefit of everyone.

Non-financial Misconduct

The FCA considers itself to have gone on a journey with their D&I expectations of firms. Initially they focussed on ‘tone from the top’ (senior leaders), this was followed later by an extended focus to ‘tone from above’ (line managers) and the final stage ‘tone from within’ (all employees). This shows recognition of the importance of leadership and management in establishing culture and good behaviours, but that everyone is accountable for embedding this and taking responsibility for the part they play.

One way the regulators plan to address this is by strengthening rules around non-financial misconduct and better integrating these into considerations within employee fitness and propriety (F&P) assessments, Conduct Rules, and the Threshold Conditions that ascertain the suitability criteria for firms to operate in the financial sector.

FCA Chief Executive Nikil Rathi has said:

“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.”

We can expect greater clarity on the types of behaviour they consider to constitute non-financial misconduct when the rules are published, but they have given the examples of bullying, and sexual or racially motivated offences. They have also indicated that such serious behaviour in a person’s personal life could also be relevant and that they will provide examples of what they do, and don’t, consider relevant to F&P assessments.

The result of this is that firms who have not yet linked this into their F&P assessments will no longer be able to address this kind of behaviour as an isolated ‘HR issue’ and internal processes will need to bring together all relevant information.

Culture and Inclusion

While the importance of diverse representation is acknowledged and built into the requirements, there is a greater focus on inclusive cultures than we have seen from the regulators before. Firms with greater diversity can benefit from a broad range of skills, knowledge, and experiences, both in their decision-making and throughout the design and provision of products and services. Yet diversity by itself is not sufficient.

Firms need to foster inclusive cultures in which all employees feel comfortable contributing, speaking up and challenging. It’s all very well recognising and increasing the diversity of your organisation, but what is the employee experience when they get through the door? Are they valued for the different perspectives their diversity brings and are they able to contribute and challenge?

This will be reviewed through annually reported culture and inclusion metrics in the three layers of Board, senior leadership, and all employees. The proposed metrics ask whether employees feel:

  1. Safe to speak up if they observe inappropriate behaviour or misconduct.
  2. Safe to express disagreement with or challenge the dominant opinion or decision without fear of negative consequences.
  3. Their contributions are valued and meaningfully considered.
  4. They are subject to treatment (for example actions or remarks) that had made them feel insulted or badly treated because of their personal characteristics.
  5. Safe to make an honest mistake.
  6. That their manager cultivates an inclusive environment at work.

Diversity without inclusion is a missed opportunity and leads to unfulfilled potential – the opportunity to foster creativity, challenge and innovation will be lost. The Regulators view this as a risk to the firm, its clients, and the sector more broadly.

In a world where the use of AI is accelerating at speed, the variety of business models is growing, the government and regulators have expressed concern about financial inclusion and the global economy presents both challenges and opportunities, it’s easy to see why the regulators want to open the doors to new, diverse talent and create environments that will enable the UK financial sector to maintain its prominent position in the global financial landscape.

Embedding D&I is a cultural change

The financial services sector has made good progress with D&I. While some firms may find the requirements are all new to them, many will not introduce completely new aspects to the work firms are already doing. For example, collecting some form of demographic diversity data is now quite common and D&I strategies are often in place or part of a broader people strategy. Even where the foundations are in place, successfully embedding D&I is a cultural change and there are important questions that firms need to ask themselves, such as:

  • How are we using the demographic data we record to analyse and measure our diversity across the employee lifecycle, and how is this driving our actions?
  • How are we ensuring that our D&I strategy is evidence based, accessible to everyone and includes clear, measurable goals and objectives that can be reported on?
  • How do we define and share our vision of an inclusive culture and how do we provide the opportunity for everyone to understand this and be accountable for the part they play?
  • How do we measure whether we have an inclusive culture where everyone feels they are valued for their contributions and that provides the psychological safety for people to speak up about misconduct or disagree with the dominant view?

Inclusive Leadership

It’s particularly important that line managers are given the support they need to develop inclusive leadership skills. It can seem intangible, but this is not the case and it doesn’t have to mean doing lots of new tasks or having lots of new initiatives – at its heart it’s about how you do what you already do. This includes how you attract and select new talent, how you develop and promote people, how you select people for growth and development opportunities, how you run meetings, how you communicate and importantly, how you listen to people. Understanding and developing inclusive leadership skills is critical for this cultural change.

Time To Act

hed later this year, and the reporting rules will come into force 12 months later, followed by a 3-month reporting window. This means that firms will have a maximum timeframe of 15 months from the date of publication to improve, or develop and implement, strategies, targets, policies, governance, oversight, and data collection processes.

When you go back to the desired outcomes of these new requirements – having an inclusive culture where new ideas and challenge are welcomed, better decision making, attracting, and progressing new talent with diverse perspectives and providing products and services for more customers, it is easy to argue that the steps needed to achieve this are simply best practice.

The business case is clear, and the regulators are telling us that now is the time for firms to focus on how they are embedding D&I and making real progress.

Source: Article “Embedding Diversity and Inclusion” was written by The ZISHI experts, and published in the Advice Matters Magazine | 2024 | Vol 01 | Edition 01

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