Financial regulators launch a new consultation on diversity and inclusion – here’s what it means for the finance sector and beyond.
It’s been a busy summer so far at the HQ of the three main financial regulators. And this time they mean business. On 7 July 2021, they launched a radical discussion paper inviting views on how to pick up the pace of change on diversity and inclusion in the finance sector. This was swiftly followed by a further consultation paper issued by the Financial Conduct Authority (FCA), which proposed to compel certain firms to do more on diversity by setting board targets which must be met, or if not, an explanation provided (so-called “comply or explain”). Here’s what could be in the pipeline and what it could mean for businesses outside of the financial services sector.
The proposals put forward by the regulators are ambitious and whilst they are aimed at improving diversity and inclusion in the financial services sector, if efforts prove to be successful, it is very likely we will see other industries adopting similar ideas.
At the heart of the consultation paper is the fact that the regulators think that despite all efforts undertaken so far, progress has been slow and in some cases is in fact starting to go backwards. So the overall message to the industry seems to be this: Get your house in order, or we will do it for you.
Open until 30 September 2021, the paper seeks views on 29 questions covering a range of topics. It invites comments on a number of proposals it puts forward, such as the use of targets for representation, measures to make senior leaders directly accountable for diversity and inclusion in their firms, linking remuneration to diversity and inclusion metrics and using existing regulatory powers to hold individuals accountable. The paper also makes clear that it wants to explore if and how a collection of diversity data can be improved and will be launching a voluntary pilot to try and understand more about what is collected at the moment and what barriers might exist that prevents this being better. However, the definitions proposed by the regulators of “diversity” and “inclusion” go beyond the nine protected characteristics listed in the Equality Act 2010. By diversity, the regulators mean “diversity of thought” – meaning they want to bring together a wider range of thinking styles, including “different perspectives, abilities, knowledge, attitudes, information styles and demographic characteristics, or any combination of these” – so not easy to pin down or clearly define.
As well as looking at improving data collection, views are also sought on the potential for requiring firms to publish diversity data, and we may see the regulators adopt a similar approach to gender pay reporting requirements, at least in so far as requiring that information to be published on the website. This will need to be balanced alongside data protection requirements to ensure that GDPR is not breached. However, if this proves effective, it will be interesting to see if other industries adopt this approach, paving the way for the public to be able to hold organisations to account as regards their progress.
Unsurprisingly, there is also a strong emphasis on the importance of the “tone from the top” with board diversity targets being proposed alongside a “comply or explain” approach for listed firms to have at least two “diverse” directors, similar to the requirements under NASDAQ listing rules. Diversity should be part of succession planning and board suitability when thinking about appointments and targets may even extend out to the wider senior management team, customer-facing roles, those certified under the Senior Manager and Certification Regime or even the wider firm. To increase scrutiny of Senior Manager diversity, the regulators are considering collecting data on individuals applying for approval and where an appointment would “worsen or not address an existing lack of diversity” they may enter into discussions with that firm.
Individual accountability may also be introduced at certain “duel regulated” firms with existing prescribed responsibilities being extended to cover diversity and inclusion, or if, prescribed responsibilities don’t apply, they may go to existing senior managers as part of their overall function responsibilities.
Adding bite to the proposals, regulators would like to link variable remuneration packages for responsible senior managers to reflect their performance against diversity and inclusion objectives as a means of incentivising action.
Diversity and inclusion policies are another important tool that the regulators are looking at requiring firms to have and they are seeking views on including a requirement for all firms to have such a policy and publish it on their website. Areas that it would like to see included could be around clear objectives, realistic goals, a plan for meeting those goals, and ways for measuring progress. Again, if successful, we may see this being adopted across wider industries, perhaps to sit alongside any diversity data that is published.
Finally, the regulators are encouraging firms to conduct diversity and inclusion audits and are exploring the possibility of putting in place a requirement for firms to train employees on diversity and inclusion and invites suggestions as to what this should cover. Many firms already provide this to staff, particularly as part of the on-boarding process, however, it may be that this will need to be refreshed and perhaps undertaken on an annual basis and maybe as part of an overall appraisal process.
The discussion paper is open until 30 September 2021 and the feedback and data received will be used to develop detailed proposals with a joint consultation planned for Q1 of 2022.
A link to the full paper is here: Diversity and inclusion in the financial sector – working together to drive change or it can be found on the FCA’s website.
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Olivia qualified as a Solicitor in 2005 and is a Legal Director in the Employment Team. She predominantly acts for clients in the financial services, life sciences and technology sectors.
Olivia has considerable experience handling employment tribunal litigation for employers, having worked on many complex, multi-day claims involving unfair dismissal, discrimination, whistleblowing, breach of contract and unlawful deductions from wages. She has advised on matters in the Employment Tribunal, Employment Appeal Tribunal and Court of Appeal.
Olivia also has considerable experience working on cross-border international transactions and managing day-to-day international employment advice for clients operating in multiple jurisdictions.
Olivia understands the unique challenges faced by clients, having spent two spells in business – the first acting as in-house Employment Counsel for a global investment management company managing advice in EMEA and APAC and the second as Global Employment Counsel for one of the world’s leading on-line payments companies.
Olivia has a particular interest in helping companies navigate their way through compliance with the Senior Managers & Certification Regime (SMCR). She is a member of the Financial Services Lawyers Association, sits on the Employment Lawyers Association (Regulatory and Finance) Committee and is a contributing editor of Bloomsbury’s “The Employment Practitioners Guide to Financial Institutions”.