In Focus: Diversity and inclusion – what next for regulation?

It’s fair to say that our industry hasn’t had the best reputation when it comes to diversity and inclusion. But as the conversation around these issues both within our sector and wider society continues to grow, the need for clear decisive action is also increasing.

The importance of this was underlined by the FCA, Prudential Regulation Authority (PRA) and Bank of England which together called for input from the industry as part of a recent joint discussion paper on this very subject.

Knowing what decisive action looks like isn’t always straightforward when it comes to diversity and inclusion. So, while we wait for the next steps following the discussion paper to be announced, most likely next year, we’re going to explore some of the measures that the regulators are considering and what this might mean for firms across the industry.

These are far-reaching issues and the discussion paper covers a lot of ground, so for this article we have focused in on some of the highlights and fresh perspectives suggested at this stage by the regulators.  

Progress so far?

When it comes to progress to date, the regulators argue that the financial services industry has only just scratched the surface of the different issues that need to be addressed.

It says, “Despite years of discussion and many research studies, the conversation about diversity and inclusion in many ways is still in its infancy. Most effort to date has focused on gender and we are a long way from bringing discussions about other aspects of diversity to the table in the same way, let alone talking about the challenges experienced where different diversity characteristics interact. Conversations tend to be about diversity rather than inclusion (because diversity is easier to achieve and measure).”

Other specific challenges highlighted are sizeable gender and ethnicity pay gaps, a lack of diversity at senior levels across the industry and products that don’t always meet the needs of disadvantaged groups. None of which will come as a surprise to most readers.

Fresh food for thought

If some of the problems around diversity and inclusion feel all too familiar at this point, then the regulators’ perspectives on why progress has been slow may offer some fresh food for thought.

In particular, they point out that the process of identifying and fixing problems around diversity and inclusion is often the wrong way round, with the industry still relying heavily on members of disadvantaged groups to “articulate the problem and design solutions for us”.

They also highlight that staff often don’t have the necessary vocabulary and skills required to properly conduct “open and constructive conversations about sensitive subjects such as race” – and this applies both within firms and industry regulators alike.

Perhaps the most obvious, but nonetheless important, inhibitor is limited data which stops effective research being carried out and prevents us all from getting a true picture of diversity and inclusion.

Driving change

On a positive note, the growing spotlight on Environmental, Social and Governance issues could be beneficial for progress on diversity and inclusion too. Indeed the regulators believe that the prominence of ESG will “helpfully serve to keep diversity and inclusion at the forefront of the minds of boards, executives and staff.”

But the regulators aren’t just going to wait around for this to happen on its own. They have set out an intention for diversity and inclusion to become part of how they regulate firms while being careful to point out that they will avoid prescribing a ‘one size fits all’ approach.

Even at this early stage of discussions, the regulators outline some practical steps for how they could potentially make this happen. They expect that most of the responsibility for diversity and inclusion should come from senior leadership, in what is described as the ‘tone from the top’. And they also suggest more specifically that linking progress on diversity and inclusion to remuneration could be a “key tool” for instilling accountability and incentivising firms. Reforms to the Senior Managers and Certification Regime (SMCR) may be considered too, as a further way of securing meaningful improvement.

Establishing “inclusive cultures” within firms is another important component highlighted in the paper. And there is an interesting crossover here between mental health and wellbeing in the workplace, with the regulators pointing out that “psychological safety is an essential first step to creating an inclusive culture.” Without this, they argue that even if an organisation is trying to be more inclusive, staff may be unwilling to speak up and raise concerns.

Although outlined more loosely, for now at least, the paper stresses again the importance of firms considering the diversity of customer requirements. It wants businesses to understand the diverse needs within each of their target markets and take these into account when delivering products, services and communications.

Looking ahead

There’s certainly a lot more to explore around diversity and inclusion and now, with the combined force of the regulators behind it, we suspect that this will be a subject we return to many times next year and beyond. So as we head towards 2022, look out for more interesting industry perspectives and updates on what will undoubtedly be positive changes for our sector.