With International Women’s Day being celebrated on 8 March, it can surely be no coincidence that last week the PRA issued all dual-regulated firms with a letter reminding them of its rules on board diversity. However, the regulator has more than just the advancement of women in its sights.

The letter follows a number of related communications emphasising the importance both the PRA and the FCA currently place on senior management diversity, including:

  • the FCA’s Dear CEO letter on non-financial misconduct (January 2020) addressed to the wholesale general insurance market in which it made clear that it expects firms to deal appropriately with non-financial misconduct and that the failure to do so may be viewed as misconduct itself;
  • the FCA’s Sector Views paper (February 2020) which identified (again) that drivers of poor conduct may include lack of diversity;
  • the FCA’s DP 20/1 – a collection of essays on "Transforming culture in financial services" (February 2020) which notes in the foreword from Jonathan Davidson that there are ever more insistent societal calls on firms to make progress on diversity, but also highlights that firms which achieve diversity without an inclusive culture are unlikely to fully realise the benefits of that diversity;
  • the FCA’s report on "Gender diversity in UK Financial Services" (November 2019) which revealed findings that women represent just 17% of individuals in roles requiring FCA approval; that this percentage has not changed since 2005; and, interestingly, that women are slightly better represented in senior manager approved roles as opposed to customer-facing ones.

The regulators’ interest in diversity is not new. It has been a supervisory priority of the FCA in particular and the PRA’s rules have been in place for a few years now. However, as the above train of publications indicate, it is clearly gathering momentum. As is reiterated in the PRA’s letter, these rules require firms to have in place a policy to promote diversity of their management board and publicly explain on their websites how they meet these requirements. Larger credit and investment firms must also set gender-based targets. However, the letter notes the findings of the recent EBA report on the benchmarking of diversity practices (see alert) that 30% of the firms sampled did not have such a policy in place.

Since the financial crisis there have been repeated references by the regulators in speeches and discussion papers to studies evidencing the good business reasons for ensuring diverse management bodies, from reduced risk-taking and improved compliance through to better decision-making and long-term sustainability of business models. Notwithstanding the timing of the PRA’s letter, this is clearly not just a matter of social justice for the regulators – diverse boards are also a risk-management tool. However, achieving diversity in senior management is a challenging, multi-faceted issue that will require a serious long-term commitment to a holistic approach in order for positive change to emerge. Simply telling firms that they should want to have a diverse management body does not seem to have produced the desired outcome though.

The PRA letter makes clear that there is now a regulatory imperative for firms not to bury their heads in the sand about diversity. For Chairs of dual-regulated firms, this latest letter in particular is a clear warning that this is an issue on which the PRA expects to be engaging with them in the near future, and so they need to be familiar with their policy on management board diversity and what steps they are taking to embed this policy in practice, for example, in succession planning. In some cases, urgent remedial work may need to be undertaken, especially for those firms with no such policy in place. With the Senior Manager and Certification Regime now in force, Chairs of solo-regulated firms (especially enhanced firms) would be well advised to elevate diversity up their agenda too, and ensure it is taken into consideration for new senior manager appointments.

It will be interesting to see how this focus develops both in terms of (i) whether, over time, it actually produces results in terms of board composition in financial services firms; and (ii) how aggressive the regulators will be about enforcing their rules and whether they will move to look at not just whether targets are in place, but also whether they are being achieved in practice.