The FCA diversity and inclusion drive

05 May 2021

The FCA diversity and inclusion drive

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In March, the Financial Conduct Authority (FCA) published a speech focusing on the FCA diversity and inclusion drive. Entitled ‘Why diversity and inclusion are regulatory issues’, the speech was given at the launch of the HM Treasury Women in Finance Charter Annual Review by CEO, Nikhil Rathi.

The CEO explained that the FCA and the Prudential Regulation Authority (PRA) are developing a collaborative method to diversity and inclusion in the financial services industry, to start transforming culture within financial firms.

The evidence for a diverse team improving business is strong. According to research, diverse companies are 35% more likely to outperform the least diverse.

As part of the introduction of the Senior Managers and Certification Regime (SMCR), the FCA introduced five conduct questions to help senior managers place a heavier focus on conduct risk. But according to Mr Rathi, they would like to add a sixth, asking all firms: ‘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?’

Mr Rathi suggested that if the FCA does not see improvement in diversity at the most senior levels, the governor may consider further action.

This is also where inclusion comes into play. Mr Rathi noted that the issue is larger than just representation and that a cultural change is needed to empower staff from all different backgrounds to feel confident and respected in their workplace.

In recent FCA guidance on vulnerability, the regulator said that all firms needed to understand the needs of their customers and be able to respond to them through ‘product design, flexible consumer service and communications.’

This questions whether firms can effectively answer the needs of their customers if they do not have the ‘diversity of background and experience required to overcome biases and blind spots.’

The speech has considered whether D&I should be part of the FCA Premium Listing Rules, noting that many investors are already taking steps towards this when it comes to investing. Investors are now looking for improved portfolio configuration and are applying pressure when it comes to corporate social responsibilities, such as ESG and diversity.

‘In the US, we have seen the Nasdaq take the lead with its listing rules, which will require all companies listed on its US exchange to have, or explain why they do not have, at least two diverse directors. As part of our regulatory work on diversity and inclusion and the listings framework, we will be exploring whether we should make similar requirements part of our premium listing rules.’ Mr Rathi explained during the speech.

At a broader, more social level, Mr Rathi concluded by highlighting that inadequate D&I outcomes result in conduct risks by firms that fail to reflect and serve a diverse society, and it is at that point that they become regulatory issues.

Negligence to reflect values that are so highly sought after in investment activities within companies would be a clear case of ‘physician, heal thyself’, Mr Rathi explained.

‘We are already noting an uptick in legal and compliance advisory work in this area, with intense media focus and an active disputes horizon, and we anticipate that the regulator will become increasingly engaged as these risks intensify.’

The five conduct questions asked by the FCA are designed to focus on a 'tone from within' and require every person in an organisation to be personally accountable. The proposal to add a sixth question may embed a behavioural change, with diversity and inclusion being 'another telling indicator of culture'.

Keep up to date with the transforming FCA diversity and inclusion drive and the ever-evolving universe of regulatory compliance through our SMCR hub.


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Keep up to date with the universe of regulatory compliance through our SMCR hub.

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Ideagen's content executive Chloe Weaver
Written by

Chloe Weaver

As Ideagen’s Content Marketing Executive, Chloe produces engaging content to inform and educate customers on the intricate world of quality, audit, risk and compliance. With a journalistic background in renewable and nuclear energy, Chloe is passionate about creating content to educate, enlighten and inspire customers.

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