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Launching a discussion paper, the Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA) and Bank of England (BoE) said policy options include regular reports from firms on demographic and socioeconomic diversity of board members, as well as wider information across firms, which could be made public. The regulators are also considering setting targets for representation and measures that would make senior management “directly accountable” for D&I in their companies.
Among the proposals, the regulators suggest linking D&I targets to remuneration for senior management and are considering whether D&I should become part of the “fit and proper” test for senior management.
Nikhil Rathi, CEO of the FCA, said the regulators are “concerned that lack of diversity and inclusion within firms can weaken the quality of decision-making”.
Sam Woods, deputy governor for prudential regulation and CEO of the PRA, said “more needs to be done to speed up progress”, with only “some” movement towards greater D&I during the past ten years.
“Regulators and industry need to work together to increase diversity at senior levels and ensure that the UK’s financial services firms are best equipped to serve the economy. A lack of diversity of thought can lead to a lack of challenge to accepted views and ways of working, which risks compromising firms’ safety and soundness,” Mr Woods said.
A pilot project will test out proposals around data collection on demographic diversity of boards, senior management and the general workforce. This is due to start later this year, with a full consultation on detailed proposals for disclosures, targets and the potential for sanctions slated for Q1 2022.
The discussion paper also questions the scope of applying any new measures, particularly for small firms, and is seeking views on proportionality.
Natasha Adom, senior lawyer at law firm GQ|Littler, said: “The challenge for regulators is to deliver a diversity and inclusion policy that has teeth. Many of the policies they’ve laid out are very progressive as the feeling is that while there has been progress in certain areas, that rate of progress is not fast enough.
“Additional public reporting on the ethnic and social background of staff could help drive real change but it is not straightforward for employers and there are lots of complexities,” Ms Adom added.
The regulators said increased D&I within financial services will improve governance, decision-making and risk management. It would help create a more innovative sector with products that better suit the diverse needs of customers, they added.
Today, fewer than one in ten management roles in financial services are held by Black, Asian or other ethnic minorities. While a study of eight firms found 89% of senior roles are held by people from higher socioeconomic backgrounds.
Gender diversity in financial services and gender equality in pay have received more attention, yet last year only 13 (5%) of FTSE350 CEOs were women. The 2021 Women in Finance Charter annual review recorded an average 32% female representation in senior management roles, an increase of less than 1% since 2017.
Sir Jon Cunliffe, deputy governor for financial stability at the BoE, said: “Groupthink and overconfidence are often at the root of financial crises. Enabling a diversity of thought and allowing for an array of perspectives to coexist supports a resilient, safe and effective financial system.”