07 Apr 2022

Diversity, equity and inclusion: a key priority

UK regulatory attention is increasingly turning towards diversity and inclusion: it is now core to the policy agenda.

By Peter Flynn

Associate, Funds Regulation & Governance

3 minute read time

In 2021 the FCA’s business plan was clear that this was a priority topic, and we saw the publication of a joint discussion paper (DP21/2) from the FCA, PRA and Bank of England in July, followed by a pilot data survey in October. In 2022 the momentum will continue to build, with a subsequent consultation paper expected in the first half of the year, followed by a policy statement.

It is understandable that this topic should be gaining increasing focus: better outcomes on diversity bring a range of benefits, in areas fundamental to UK regulators’ responsibilities, such as enhanced consumer protection and positive outcomes in risk management, conduct and culture.

 

Existing frameworks

A regulatory and legislative framework has been in place for some time: the Corporate Governance Code, for example, sets out the role of the nomination committee in developing and reporting on diversity. Legislation such as the Equalities Act sets out the law on matters such as unlawful discrimination. Campaigns such as Hampton Alexander and the Parker Review encourage firms to improve diversity in terms of gender and race, respectively, particularly at board and senior management level. Other initiatives such as the Women in Finance Charter, Race at Work Charter and Social Mobility Taskforce have also helped drive policy and improve outcomes.

But as the regulators noted in DP21/2, the conversation is still in its infancy. A range of potential areas for development were considered in the discussion paper, and these will form the basis for enhancements to policy in 2022 and beyond.

 

Areas for development

One example is on measurement: the paper noted that there has been discussion as to whether diversity metrics are too input-focussed rather than outcome-focussed. It is important to consider whether the data being measured and reported is providing adequate insight.  Key to this is ensuring parity of reporting across all protected characteristics.

Inclusion is an area of particular focus: creating a more inclusive financial sector brings a range of benefits including avoiding ‘groupthink’, which has knock-on effects for competitiveness, risk management and culture. This can be challenging to measure, however, and has arguably received less attention than diversity. We are therefore likely to see further initiatives this year in terms of improving outcomes across the sector in this space.

‘Tone from the top’ has been in the spotlight in recent years – whether that be through initiatives such as Hampton Alexander or through board reporting. However, diversity at senior management level is only a part of a firm’s overall approach. Increasingly, focus is turning to ‘tone from within’, and the experience of more junior employees. This covers a wide range of areas, including succession planning, nurturing future leadership talent and culture. A more holistic view of diversity and inclusion will examine experiences across firms, from top to bottom.

 

At the heart of the regulatory agenda

The diversity and inclusion agenda is entwined with a range of other regulatory themes in 2022 – consumer duty, environment, social and governance (ESG) and the competitiveness of the UK as a jurisdiction. The discussion paper noted that a firm which can call upon a range of views and backgrounds in its decision-making is more likely to deliver products of relevance to a wider range of consumers, including disadvantaged groups. As ESG continues to build momentum, attention is increasingly focussing on the ‘G’ – governance – and on matters such as board composition, succession planning, and culture. And the evidence shows that more diverse and inclusive firms help contribute to a more stable, fair, and effective market.

Regulators have said they expect to see ‘rapid and substantive progress’– meaning that the consultation paper in the first half of the year, and the policy statement in the second half, will be vital policy milestones for all firms to engage with and prepare for. If, as the discussion paper argued, the treatment of this topic is still in its infancy, then 2022 should be a year in which it receives an important regulatory boost.

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