Speaking at the Women in Finance Charter Annual Review Launch, the FCA CEO, Nikhil Rathi, referred to possibly expanding on the five conduct questions that the FCA ask of senior managers on conduct risk, to include a diversity related question, “is 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?” A link to the full speech can be found on the FCA website here.
Reuters have reported that the Financial Conduct Authority (FCA) has warned that financial companies could face a regulatory crackdown if they continue to fail in tackling diversity concerns.
Nikhil Rathi, Chief Executive of the FCA, spoke at the Women in Finance Charter Annual Review Launch. In his speech he stated that, “diversity reduces conduct risk and those firms that fail to reflect society run the risk of poorly serving diverse communities. And, at that point, diversity and inclusion become regulatory issues.”
Rathi shared further that, “diversity is a broad topic covering a range of characteristics – gender, ethnicity, sexuality, disability and, increasingly, the social background of our colleagues…. Today, while we focus on gender equality, I want also to consider how this intersects with other protected characteristics, primarily ethnicity, and why we care about these issues not just as an employer and an exemplar for industry, but as a regulator, too.”
The FCA’s own target was to have 45 per cent of its senior leadership roles filled by women by 2020, and half by 2025. The 2020 target was missed by 5 per cent. However, last month the FCA made four appointments to its executive team, all of whom were women. These latest appointments mean 10 of the 19 people on the FCA’s board are women.
The speech from Rathi completes the trifecta of the economical, legal, and regulatory emphasis on the importance of diversity and inclusion. Research undertaken by organisations like Mckinsey and others demonstrate the importance of diversity and inclusion from a commercial and team performance perspective.
The recent decision in the case of Allay v Mr S Gehlen by the EAT in which it rejected an employers all reasonable steps defence to a claim of racial harassment on the basis that the employers equality and diversity training had become ‘stale’ and ineffective, emphasises the importance of employer’s improving the quality and quantity of their workplace training.
Rathi’s comments indicate that diversity and inclusion will become, over time, more embedded within the regulatory risk framework. Organisations need to proactively prepare for this, embedding D&I within their compliance framework, policies, culture, recruitment and succession practices.
There is an increase in the focus of D&I regulatory risk beyond the FCA. The Nasdaq exchange in New York has taken the lead in listing rules by requiring all companies to have or explain why they do not have at least two “diverse” directors.
It is not yet clear how Rathi’s statement will translate into action and whether a further expansion of the regulatory rules is to be expected. That said, the FCA’s focus on culture which it defines as “the typical behaviours that characterise a firm,” indicates that whilst diversity and inclusion has for some time been considered by the FCA a priority for firms, there is likely to be a greater focus on diversity as a supervisory priority.
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