FCA: Diversity and inclusion are regulatory issues
On 17 March, the FCA published a speech by its CEO, Nikhil Rathi, on why diversity and inclusion are important regulatory issues.
Key points highlighted within the speech include:
1. The strong business case for diversity, as well as the benefit in terms of protecting vulnerable customers - a lack thereof will raise "questions about firms’ ability to understand the different communities they serve, and their different needs";
2. The FCA is subject to the Public Sector Equality Duty and has responsibilities as both an employer and as a regulator. The speech notes that the FCA is working with the Prudential Regulation Authority to formalise its regulatory approach to diversity and inclusion "under that duty and [its] objectives - and then to make [the FCA's] expectations clear";
3. Mr Rathi would like to see a sixth conduct question added to the existing five conduct questions for senior managers on conduct risk:
"[I]s your management team diverse enough to provide adequate challenge and do you create the right environment in which people of all backgrounds can speak up?
This is much broader than representation. It is about a firm’s culture. Not just in relation to diversity, but inclusion, too. Do people feel comfortable in the work environment such that they can demonstrate, share and bring to bear their diversity of experience and background?"
4. If the FCA does not see improvements in diversity at the senior level as well as better responses on the topic from firms, it will consider how to utilise its powers to change the situation. One potential supervisory tool would include incorporating an assessment of the diversity of management teams - and the inclusivity of the management culture created - into the FCA's consideration of senior manager applications; and
5. Finally, in addition to the evident social good that diversity creates, Mr Rathi concluded that the FCA cares about diversity because it reduces conduct risk; those firms that fail to reflect society run the risk of "poorly serving diverse communities " - at which point, "diversity and inclusion become regulatory issues".
Research has suggested that greater gender diversity improves risk management culture and decreased the frequency of European banks’ misconduct fines.