Diversity and inclusion is gaining traction as a vital part of workplace culture across a wide range of industries. In this article, Liz Hornby, Principal Consultant at LEO GRC, discusses current regulatory perspectives on diversity and inclusion in the financial services industry and what needs to be done to improve.
As diversity and equality move up the list of global societal priorities, they’re also becoming increasingly central to the global regulatory agenda in the financial services sector. Regulators have a responsibility here both as public bodies and employers and as regulators of financial services firms and markets.
The Responsibility of Regulators as Public Bodies
Public bodies should lead by example. Their workforce should be as diverse and inclusive as possible, reflecting the communities in which they’re located and those they serve.
Many regulators, such as the Financial Conduct Authority (FCA) in the UK, have published their own commitments to increased equality and diversity in their own workforce at all levels.
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Diversity and Inclusion Supports Growth and Success
Research increasingly provides a strong business case for diversity. According to McKinsey, for example, the most diverse firms are 35% more likely to outperform those that are less diverse.
Of more specific interest to financial services, a study published by the Cass Business School suggests that greater gender diversity improves a company’s risk management culture. This link is illustrated in the study by the relatively low levels of misconduct fines imposed on the European banks with the highest gender diversity.
Despite this type of research and the tangible commercial benefits it suggests, the financial services industry has been slow to change. Research shows that fewer than 1 in 10 management roles in financial services are held by black, Asian, or minority ethnic people. The lack of women of color in senior positions in financial services is a particular concern.
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The Lack of Diversity in Financial Services
This lack of diversity at the top not only raises questions about risk management and culture but also about firms’ ability to understand the different communities they serve. The FCA’s ‘Our Financial Lives’ research, for example, shows that black, Asian, and minority ethnic adults are disproportionately represented among the growing number of vulnerable consumers and are therefore at greater risk of financial harm.
The pandemic has shown that women are less likely than men to have the savings needed to weather financial hardship and their employment tends to be more precarious. As a result, FCA’s recent guidance on vulnerability emphasized that all firms need to understand the needs of their customers and be able to respond to them through product design, flexible consumer service, and communications. That is difficult to achieve without the “diversity of background and experience required to overcome biases and blind spots”.
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Regulatory Responses to This Lack of Diversity
In response, global regulators are beginning to build diversity and inclusion into their supervisory work. For example, the FCA suggested in a recent speech on the topic that they are considering asking questions such as, “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?” These types of questions are broader than just representation—they are concerned with culture.
The FCA has also made it clear that should it see no improvement, it won’t hesitate to use the regulatory tools that it has at its disposal. For example, the diversity of management teams and the inclusivity of the management culture they create could become part of its consideration of senior manager applications.
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Taking the Next Steps
The need for inclusion and diversity has impacts beyond regulated firms to the way in which capital markets work. In the US, Nasdaq has taken the lead with its listing rules, which will require all firms listed on its US exchange to have, or explain why they do not have, at least two diverse directors. Other global regulators may decide to follow this lead.
Many investors, including investment banks that underwrite IPOs, are already setting such standards.
Workplace Learning for Diversity and Inclusion
Improving diversity and inclusion in the workplace goes far beyond learning, but it is a good place to start. Whether you want to focus on unconscious bias for hiring managers or creating a more inclusive workplace culture, digital learning can lay the groundwork for further development in this area.
If you want to learn more about what you can do to support diversity and inclusion in your workplace, take a look at our Equality in the Workplace course in the GRC Academy or get in touch with one of our GRC experts.