The drive for diversity across society at large is not new. Nor is criticism of financial services for its lack of representation and the disparities and inequalities among workforces within financial firms and institutions.
It may be difficult to stomach but such criticism is not undue. Often-quoted statistics such as only 17% of FCA-approved individuals are women; fewer than 1% of investment managers are black; and 38% of investment managers went to independent schools compared with just 7% of the UK population as a whole - to name just a few - speak for themselves.
The purpose of this article, however, is not to add to that criticism. Frankly, the legal industry is not much better. Rather, we want to look at why and what could finally bring about much-needed change within financial services and how.
Many people and institutions have been saying the right things for some time now. The #MeToo movement and the murder of George Floyd were a wake-up call for those lagging behind and further increased the appetite for change. But positive action to achieve that change has been lacking.
In recognition of this, regulators within the financial sector recently published a discussion paper aimed at pushing the issue of diversity and inclusion to the fore. Their objective is to ensure that the financial system is better able to support the economy through well-run firms which can meet the diverse needs of those they serve. The message given is that they are prepared to throw their weight at this if improvements in diversity and inclusion are not seen, and seen soon.
The drivers for diversity are clear
Far beyond employee well-being - if that in itself were not enough - diversity has been proven to promote creativity and, ultimately, success. The benefit of having a diverse organisation is said to be analogous to the Medici effect – the idea that increased innovation occurs when ideas, concepts, cultures and talents intersect.
Research indicates that the most diverse firms are 35% more likely to outperform the least diverse and history has given us numerous examples of developments and advancements that have all had diversity at their core. So too, then, should those firms most looking to succeed.
For financial services specifically, diversity is said to increase resilience and strengthen organisations by reducing their vulnerability to the frailties of human decision-making. Even if unintended, human judgement is tainted by bias. A lack of diversity leads to groupthink which results in insufficient debate and critique of this tainted judgement.
Firms need diverse perspectives to be able to recognise error and risk. They need to be inclusive and embrace the value of differing viewpoints to empower and enable people to voice and act upon any concerns they may have. Feeding a broad range of mindsets, abilities, experiences and background into decision-making leads to better risk management that, in turn, results in greater resilience. Having a resilient financial services sector brings undoubted benefits to us all.
On the retail side, financial institutions are better able to understand and meet the needs of consumers if they are sufficiently diverse to overcome blind spots and bias. The composition of these institutions should arguably more closely reflect the society they support to avoid potentially misguided views and outcomes determined by one small section of that society being imposed upon everyone else.
The Governor of the Bank of England recently acknowledged that, as a public institution, the bank needs to represent the diversity of the country in what it looks like, who it talks to and the impact of its decisions. Greater diversity and inclusion will also inevitably promote the understanding, trust and empathy upon which the best consumer and advisory relationships are built.
For venture capitalists, more diverse firms are more likely to fully consider the range of opportunities in the market and not be prevented by preconceptions, judgements or biases from tapping into them. Research has shown that between 2009 and 2019 only 38 black entrepreneurs received venture capital funding. Alongside their teams, they received just 0.24% of the total sum invested. A miniscule 0.02% of total venture capital invested went to black women entrepreneurs. Was this purely down to a lack of diversity in the firms they approached? Who knows but, without that diversity, it certainly begs the question.
Diversity is also an essential ingredient of our financial industry generally. Since 2016, the City of London has been at risk. Although it is not nearly as bad as many people feared, we are now in greater competition with European financial capitals on the one hand (particularly after the latest push from the European Central Bank to move staff and capital to the EU) and Singapore and New York on the other.
We need the best staff, the best innovation and productivity, and to make the best decisions to ensure the UK remains an attractive place to work and do business. There is a huge talent pool out there, but we are only using part of it. Sadly, too many firms are still excluding so many other parts. Employees, investors and other stakeholders should take note of this and factor it into their decisions on where to operate.
Firms that put aside their preconceptions, judgements and ideas of who is the ‘right fit’ will have many more recruits to choose from and stand a greater chance of being attractive, both to those recruits and others. It will be these firms that will be at the forefront of those fighting to survive in a far more competitive global market, boosting both their own success and the opportunities for the wider UK economy at large.
So how do we instil this much-needed diversity and inclusion into the financial services sector?
Much has been said about the need for firms to foster a healthy culture and how diversity and inclusion are core components of this. A poor culture can directly harm consumers, market participants, employees and even markets. But is the right culture key to diversity and inclusion or is diversity and inclusion key to the right culture? Ultimately, it doesn’t matter.
Whichever way you look at it, diversity and inclusion are central to how firms should operate and a culture they should be striving to achieve. Diversity should be embedded and manifested throughout firms – from the board, senior management, managerial, technical and professional staff right down to apprentices and interns - making it part of ‘business as usual’ throughout all activities.
A culture lacking in such diversity and inclusion is not one in which people would necessarily recognise fault or be prepared to speak up and be heard. In fact, it is probably not one people would like to work in at all. An equal, inclusive culture enables firms to recruit from the widest talent pool and retain their best people. This in turn should naturally lead to the best business choices being made and the best risk decisions being taken. For the financial sector in particular, the importance of this cannot be underplayed.
What can and should the regulators do to drive meaningful change?
The regulators’ discussion paper canvassed opinion on potentially enhanced obligations on firms in relation to data collection, monitoring, audit and disclosure. Transparency and the accountability that flows from this are key to progression, but the measures proposed will place an administrative burden on an industry still facing the toll of Brexit and Covid-19. Regulators need to strike the right balance.
Views were also invited on the widening use of targets, while emphasising that this must not lead to a box-ticking exercise. Appointments purely on the basis of gender, race, social mobility and so on are insulting, both to the employee and the ethos of any firm that truly values diversity and inclusion. The risk and absolute unacceptability of tokenism could be the subject of an entire article in itself. Again, the balance has to be right.
The paper then refers to what regulators could do about those working in the industry, recognising that individuals are ultimately responsible for their own actions and behaviours, in addition to the practices and strategic thinking of their firms. It refers to linking remuneration to diversity metrics. What better way to incentivise leaders to put it at the top of the agenda than by affecting their variable pay? But metrics require data collection, monitoring and analysis, which brings us back to the burdens mentioned above.
The regulators highlight that the Senior Managers and Certification Regime (SMCR) could be an important policy tool in this regard. We totally agree. Utilising the existing regulatory framework may well be the simplest, most immediate means of driving progress and the path of least resistance, certainly as far as organisations are concerned. Enforcing appropriate standards of behaviour, conduct and attitude at an individual level will inevitably play a significant part in achieving a change in culture within firms as a whole.
To explain, the FCA already requires an assessment of ‘fitness and propriety’ before individuals can be certified by their senior manager or approved by the FCA to perform certain roles. This includes looking at whether a person’s reputation or ‘abuses’ affects the firm. Traditionally, this has been seen in terms of financial soundness, disciplinary action and performance. Essentially, from a regulatory perspective at least, as long as someone was able to do the job in hand, they could pass the standard notwithstanding any unsavoury behaviours they may have displayed.
The FCA is now exploring whether adverse findings on conduct with respect to diversity and inclusion could affect this assessment in future. In fact, there is already a growing recognition that people who bully and harass are not going to be fit and proper and will be in breach of Conduct Rule 1 for a lack of integrity. We fully support this together with the idea of formalising the need to give greater attention to such ‘non-financial misconduct’ from now on. This is not adding new wording to Fit 2 but building on the existing requirement that individuals not only need to be financially sound and competent to be able to perform a regulatory function but must also have integrity and a good reputation, taking into account ‘all relevant matters’.
A culture where ’non-financial misconduct’ like harassment and discrimination is tolerated is not just unacceptable but is actually harmful to regulatory functions as people will not speak up or challenge decisions and assessments of risk. The FCA has proposed developing guidance on the matters that the assessment should now encompass and indicates that it will include evidence of harassment, bullying and discrimination. The role of the senior manager in creating and maintaining a healthy personal and business culture, both through their own actions and those for whom they are responsible, is in focus.
What steps will ultimately be taken by the regulators as a result of the discussion paper remains to be seen. At the very least, firms should expect more regulatory engagement and scrutiny and be prepared to explain the reasons why they are not moving fast enough in the right direction. Businesses in financial services and beyond have to adapt to the changing expectations of consumers, employees and investors. Uniformity and unhealthy working cultures need to be things of the past.
Businesses are realising that empathy, social intelligence, resilience and prospects of success are enhanced where there is a greater depth of personality, experience and background at their foundations. But financial institutions need to do more to instil diverse, inclusive working environments. They need to get the best people from the widest talent pools, overcoming prejudice and bias. If they do not, they will be less attractive to recruits, investors and other stakeholders, less competitive and less resilient.
Regulators have recognised that this is not only the right approach but also the necessary approach. It is now time for the rest of the financial sector to follow suit.