Diversity and Inclusion in the Financial Sector – Expectations for ‘Small Firms’

Environmental, Social and Governance (ESG) issues are rising to the top of the agenda for corporates, investors, and wider society, and the issues of diversity and inclusion are viewed among the ‘social’ considerations.

A lack of diversity in financial services was highlighted as a factor in the 2008 financial crisis. Looking at risk management outcomes, studies that compared the outcomes between diverse and non-diverse Boards following the crisis found that businesses with more diverse and risk-averse Boards had better outcomes. In the insurance sector, the FCA believes that not enough has been done.  On 30th October 2023, the FCA held a joint webinar with the PRA to discuss their proposals on diversity and inclusion in the financial sector, and you can view a recording of the webinar here.

Diversity and inclusion are central to firms’ roles as businesses and employers. The regulators have been taking increasing steps to enhance diversity and inclusion within the financial sector, for example through a more assertive supervisory focus on non-financial misconduct under the Senior Managers and Certification Regime (SM&CR) (as proposed for all firms under CP23/20), and the integration last year of gender-neutral pay policies in the dual-regulated firms’ Remuneration Code.

What has the FCA found in smaller firms?

In the current CP23/20 Consultation, most of the requirements affect firms with over 250 employees, which are referred to as ‘large firms'. Those firms with 250 employees or less, on average during a year, will be classified for these purposes as ‘small firms'.

In December 2022, the FCA published a web page titled ‘Understanding D&I in financial services’ in which it published data split between larger (more than 250 employees) and smaller (250 employees or less) firms.

The data suggests that small firms are lagging far behind large firms in almost every element of embedding DE&I, also indicating that small firms genuinely struggle to be able to accommodate any significant element of diversity or inclusion.

As an example, under the heading of senior manager accountability, the question “Do one or more of your firm’s senior management have a diversity and inclusion objective?” was answered by small firms as follows:

  • No – 77%
  • Yes – 14%
  • Not answered – 9% (so most likely the 77% is 86%)

How can small firms adapt? Culture is the key.

In the FCA’s view, firms are likely to struggle to make sustainable, meaningful change without greater attention to culture, and understanding the steps needed to prevent behavioural bias and discrimination. Firms should consider long-term plans to deliver change, backed by senior-level commitment.

A good number of firms rely on outdated practices that no longer fit a modern, multicultural, and diverse workplace; welcoming different perspectives is critical to an inclusive culture.  Inclusivity should mean that everyone feels:

  • Involved
  • Valued
  • Respected
  • Treated fairly
  • Part of the workplace

Experts and advocates for Diversity, Equality and Inclusion encourage businesses to consider some of the following:

  • Resources – giving employees the support they need including advocates for inclusion, employee resource groups, policies such as mental health, menopause, flexible working etc, which help to create an inclusive environment. 
  • Having a voice – focus groups which allow contribution from staff to policies and support needed, encouraging means by which staff can contribute to matters they are interested in.
  • Learning & development – staff need to feel that they have a career so there needs to be visible investment in their development. It doesn’t always have to be by financial funding but can simply be by encouragement and providing time for development to take place.
  • Equal pay – regular checks undertaken across an organisation to ensure this is happening.
  • Collaborative environment – people feeling part of a team and sharing in success.

So what can smaller firms do?

  • Individual accountability – ensure that responsibility for DE&I issues is allocated to an appropriate member of the firm’s senior management (an SMF holder).
  • Develop a DE&I Policy amid a wider strategy and initiatives.
  • Strive for inclusive representation at the most senior management / board level.
  • Build inclusive cultures and encourage diversity – think about ‘how we work’ rather than ‘who can we hire’ but take a proportionate approach.
  • Give employees the support they need, including advocates for inclusion, employee resource groups, policies such as mental health, menopause, flexible working etc.
  • Consider how to engender psychological safety and welcome different perspectives.
  • Understand and address behavioural biases.
  • Equal pay – regular checks should be done across an organisation to ensure this is happening.
  • Consider the suggestions in the Financial Services Skills Commission’s Inclusion Measurement Guide.
  • Consider sources of qualitative feedback such as employee focus groups or exit interviews, and encourage means by which staff can contribute to matters they are interested in.
  • Develop, support and mentor a diverse range of staff to be competent, and to grow and demonstrate their talents.
  • Understand the breadth of issues to consider when reviewing your firm’s ongoing ability to meet the Suitability Threshold Condition.
  • Ensure that all staff understand the implications of non-financial misconduct.

About the author

A compliance technical expert, Al is UKGI's Senior Technical Resources Consultant providing 'back-room' technical support which includes everything from assisting Consultant colleagues with challenging or unusual queries, to updating UKGI's compliance manual, to writing and delivering training, workshops and webinars.

Al Haughton UKGI

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