9 7월 2021
EmploymentLinks
Strength in diversity – representation and inclusion as drivers of good culture
The role of diversity and inclusion as key components of a healthy culture has moved to the fore in firms’ thinking about their culture, and this is mirrored in numerous speeches from the UK regulators and the publication this week of a joint Discussion Paper on diversity and inclusion in the financial sector.
There are multiple and inter-connected strands to diversity, presenting different challenges which all need to be addressed as the focus on diversity and inclusion sharpens in the financial services sector as elsewhere. Progress has not been consistent across all these strands or linear – for example the FCA has recognised that whilst the sector has made progress in bettering gender diversity, there is still a long way to go in relation to social mobility. External pressures on firms from various sources including the work of the Fawcett Society, the Hampton-Alexander and Parker Reviews and the gender pay gap reporting regulations continue to drive the focus on diverse cultures. Many firms have demonstrated their commitment by joining industry-based initiatives including the UK Race at Work Charter and the Women in Finance Charter. The regulators have now clearly signalled their intention to encourage further and faster progress across all aspects of diversity and to increase the focus on fostering inclusion through a culture of psychological safety.
The regulatory focus on diversity reflects the recognition that certain ‘toxic’ cultures identified within firms where conduct failings arose were perpetuated by a lack of challenge from non-diverse ‘echo chambers’ of agreement and closed views. In a 2018 speech Megan Butler, the former FCA Director of Supervision, noted in this context that most people who work within financial services are ‘not intrinsically immoral’, but rather that microcultures created within firms can lead to close-mindedness and ‘groupthink’, and ultimately poor decision-making. Regulators, Butler notes, ‘need to concentrate on changing the barrel – the culture – and not just the bad apples’.
The regulatory push for ‘changing the barrel’ by looking at culture as a driver for positive outcomes has led to increased focus on inclusion and representation in the workplace at every level. Diversity within firms, from the board down, is now seen as both an indicator of and contributor to successful governance, improved customer outcomes, engagement with core values and identified ‘purpose’. A recent speech by FCA CEO Nikhil Rathi set out his view that establishing and maintaining a diverse and inclusive culture at a firm will allow firms to truly understand the differing needs and vulnerabilities of their customers and work to ensure that they are adequately provided for and protected (see our overview of the speech here). Rathi queried whether ‘any firm can adequately respond to the needs of these consumers if they do not have the diversity of background and experience required to overcome biases and blind spots’, placing the onus firmly on firms’ diversity as a route to understanding their consumers, strengthening outcomes and fully meeting their needs – whether that be through product design, consumer service or communications.
The regulatory landscape is primed to incorporate diversity as a concrete assessment factor for firms – Rathi’s speech identified the aim of expanding the ‘5 conduct questions’, intended to help focus the minds of senior managers on conduct risk, to include a sixth 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?’ This builds on the questions Megan Butler spelled out three years ago that firms could expect to be asked, about gender diversity in hiring and promotion, equal pay, and promoting an inclusive environment.
The FCA has warned firms that it will be asking questions about representation across grades – with firms needing to consider how they access the relevant data in order to answer questions about their workforces while adhering to data protection requirements. In the short term, the regulators will run a pilot data survey during autumn 2021 to better understand what data firms are currently collecting and able to provide, to inform a longer term move towards the introduction of regulatory reporting requirements. Regardless of the scope of these reporting requirements, the Discussion Paper makes it clear that diversity and inclusion will be a key part of supervisory discussions and firms will need to ensure senior management are able to explain their diversity and inclusion strategy to regulators.
Alongside this, the regulators are now considering developing policy across a range of topics including governance, individual accountability, remuneration, policies and practices, diversity targets at all levels within firms, training, product design and disclosure. The Discussion Paper also invites views on how to provide further clarity on the use of regulatory measures to respond to diversity and inclusion failings, such as assessments of fitness and propriety, SMF approval and the threshold conditions.
There are multiple and inter-connected strands to diversity, presenting different challenges which all need to be addressed as the focus on diversity and inclusion sharpens in the financial services sector as elsewhere. Progress has not been consistent across all these strands or linear – for example the FCA has recognised that whilst the sector has made progress in bettering gender diversity, there is still a long way to go in relation to social mobility. External pressures on firms from various sources including the work of the Fawcett Society, the Hampton-Alexander and Parker Reviews and the gender pay gap reporting regulations continue to drive the focus on diverse cultures. Many firms have demonstrated their commitment by joining industry-based initiatives including the UK Race at Work Charter and the Women in Finance Charter. The regulators have now clearly signalled their intention to encourage further and faster progress across all aspects of diversity and to increase the focus on fostering inclusion through a culture of psychological safety.
The regulatory focus on diversity reflects the recognition that certain ‘toxic’ cultures identified within firms where conduct failings arose were perpetuated by a lack of challenge from non-diverse ‘echo chambers’ of agreement and closed views. In a 2018 speech Megan Butler, the former FCA Director of Supervision, noted in this context that most people who work within financial services are ‘not intrinsically immoral’, but rather that microcultures created within firms can lead to close-mindedness and ‘groupthink’, and ultimately poor decision-making. Regulators, Butler notes, ‘need to concentrate on changing the barrel – the culture – and not just the bad apples’.
The regulatory push for ‘changing the barrel’ by looking at culture as a driver for positive outcomes has led to increased focus on inclusion and representation in the workplace at every level. Diversity within firms, from the board down, is now seen as both an indicator of and contributor to successful governance, improved customer outcomes, engagement with core values and identified ‘purpose’. A recent speech by FCA CEO Nikhil Rathi set out his view that establishing and maintaining a diverse and inclusive culture at a firm will allow firms to truly understand the differing needs and vulnerabilities of their customers and work to ensure that they are adequately provided for and protected (see our overview of the speech here). Rathi queried whether ‘any firm can adequately respond to the needs of these consumers if they do not have the diversity of background and experience required to overcome biases and blind spots’, placing the onus firmly on firms’ diversity as a route to understanding their consumers, strengthening outcomes and fully meeting their needs – whether that be through product design, consumer service or communications.
The regulatory landscape is primed to incorporate diversity as a concrete assessment factor for firms – Rathi’s speech identified the aim of expanding the ‘5 conduct questions’, intended to help focus the minds of senior managers on conduct risk, to include a sixth 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?’ This builds on the questions Megan Butler spelled out three years ago that firms could expect to be asked, about gender diversity in hiring and promotion, equal pay, and promoting an inclusive environment.
The FCA has warned firms that it will be asking questions about representation across grades – with firms needing to consider how they access the relevant data in order to answer questions about their workforces while adhering to data protection requirements. In the short term, the regulators will run a pilot data survey during autumn 2021 to better understand what data firms are currently collecting and able to provide, to inform a longer term move towards the introduction of regulatory reporting requirements. Regardless of the scope of these reporting requirements, the Discussion Paper makes it clear that diversity and inclusion will be a key part of supervisory discussions and firms will need to ensure senior management are able to explain their diversity and inclusion strategy to regulators.
Alongside this, the regulators are now considering developing policy across a range of topics including governance, individual accountability, remuneration, policies and practices, diversity targets at all levels within firms, training, product design and disclosure. The Discussion Paper also invites views on how to provide further clarity on the use of regulatory measures to respond to diversity and inclusion failings, such as assessments of fitness and propriety, SMF approval and the threshold conditions.
How we can help
The regulators’ increasing focus on measuring and improving a firm’s culture, by reference to diversity and inclusion and other measures, is one of the many topics which we have helped our clients navigate. We can provide external assistance to firms in understanding and aligning themselves with regulatory expectations, supporting senior management teams as they consider how to promote diversity and inclusion and measure progress as part of the broader culture of the firm.
Linklaters has been on its own journey in improving diversity and inclusion across all levels and in October last year our dedicated Diversity Faculty was launched to support clients in navigating the legal, regulatory and governance issues that can arise in devising and delivering an effective diversity and inclusion strategy. To find out more, please get in touch with any of the key contacts listed.
