FCA: Why Diversity And Inclusion Are Regulatory Issues

FCA: Why Diversity And Inclusion Are Regulatory Issues

Speaker: Nikhil Rathi, FCA CEO
Event: Launch of the HM Treasury Women in Finance Charter Annual Review
Delivered: 17 March 2021
Note: this is the speech as drafted and may differ from the delivered version


  • The charter, which challenges the financial services industry to do better, is making a difference.
  • Diversity will be crucial in our consideration of vulnerability, particularly as we come out of a pandemic that has disproportionately affected women and people of colour.
  • We are working with the Prudential Regulation Authority on a joint approach to D&I for all financial services firms.
  • We will increasingly be asking tough questions firms about representation across grades and whether their culture is open and inclusive and provides a safe space for colleagues at all levels of the organisation.
  • As part of our regulatory work on diversity and inclusion and the listings framework, we will be exploring whether we should make diversity requirements part of our premium listing rules.

Diversity is a broad topic covering a range of characteristics – gender, ethnicity, sexual orientation, disability and, increasingly, the social background of our colleagues. Today, while we focus on gender equality, I want also to consider how this intersects with other protected characteristics, primarily ethnicity, and why we care about these issues not just as an employer and an exemplar for industry, but as a regulator, too.

When Jayne-Anne Gadhia published her 2016 review on women in financial services, she found they represented only 14% of executive committee members. Women either did not progress or they left the sector. And they left, not just because of childcare, but because the culture wasn’t right.

Harriett Baldwin, then Minister responsible, remarked upon the Charter’s launch that too little had changed during her 30 years in banking. And, while attitudes are shifting, women still receive 28% less pay than men and account for only 17% of those approved by the FCA – generally speaking, the most senior people in financial services.

This Charter is making a difference. 62% of signatories have seen an improvement in female representation in senior management. But, even among those signatories, women represent less than a third of senior management.

That matters to a regulator. Research has suggested that greater gender diversity improves risk management culture and decreased the frequency of European banks’ misconduct fines.

This Charter challenges regulators and firms to publish measurable targets and actions.

At the FCA, we set ambitious targets: women accounting for 45% of our senior leadership team by 2020, and half by 2025. That we missed our 2020 target by 5 percentage points shows we too have work to do.

As I have been building my new Executive team, I have been focused on finding the very best candidates and that has meant ensuring diverse shortlists.

Last month, after rigorous searches, we made four appointments to the FCA’s executive committee – all of whom happened to be women – all the best candidates tested in competitive processes.

Their global experience and leadership, drawn from a variety of backgrounds, adding to our existing experienced team, will be vital in ensuring we can act more quickly to reduce consumer harm and ensure market integrity. We will have female leaders in our frontline authorisation and supervision roles and in operations, data and technology.

It’s important for us to lead by example, and our new appointments will mean 10 of our 19 Board or Executive Committee members will be women.

Why we, as a regulator, care

The evidence tells us there is a strong business case for diversity. According to McKinsey research, the most diverse companies, for example, are 35% more likely to outperform the least diverse.

And there is no shortage of wider issues to address. Fewer than 1 in 10 management roles in financial services are held by black, Asian or minority ethnic people. The Parker Review reported that there were only 80 directors of colour in the FTSE250 – 5% of the total. And where there are directors of colour they tend to be concentrated in a small number of firms and few hold the positions of CEO or Chair. The number of women of colour in senior positions in financial services is a particular concern.

This lack of diversity at the top raises questions about firms’ ability to understand the different communities they serve, and their different needs.

This lack of diversity at the top raises questions about firms’ ability to understand the different communities they serve, and their different needs.

Our Financial Lives research shows black, Asian and minority ethnic adults are disproportionately represented among the growing number of vulnerable consumers – and so at greater risk of financial harm.

Women are less likely than men to have the savings needed to weather financial hardship and their employment tends to be more precarious. During the pandemic, the unpaid burden borne by women has increased, with women reporting they are doing 64% more housework than men and that their childcare responsibilities have doubled.

The Fawcett Society has shown the impact of the pandemic to be particularly acute for ethnic minority women. They are more worried about debt and less likely than white men or women to be able to make ends meet. Ethnic minority women are working more – both paid and unpaid – and are more anxious about work. Perhaps unsurprising when you consider that black African and black Caribbean people are overrepresented in front-line health and social care roles.

In our recent guidance on vulnerability, we said that firms – 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.

I would question if any firm can adequately respond to the needs of these consumers if they do not have the diversity of background and experience required to overcome biases and blind spots.

Ultimately, improving diversity and inclusion is both a matter of fairness and a crucial way to strengthen consumer outcomes.

As a public body, we are subject to the Public Sector Equality Duty and have responsibilities both as an employer and as a regulator. We are working with the Prudential Regulation Authority to formalise our regulatory approach to diversity and inclusion under that duty and our objectives – and then to make our expectations clear.

Holding firms to account

As part of our work on wholesale banking culture, we introduced 5 conduct questions to help focus minds of senior managers on conduct risk. I would like to see this expanded – and a sixth added – for 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?

This is much broader than representation. It is about a firm’s culture. Not just in relation to diversity, but inclusion, too. Do people feel comfortable in the work environment such that they can demonstrate, share and bring to bear their diversity of experience and background?

In the years ahead, if we don’t see improvements in diversity at senior levels and better answers, we will also consider how to best use our powers. This is something we will consider over the next year, in work led by Georgina Philippou, until recently the FCA’s Chief Operating Officer.

There are supervisory tools we can draw on. For example, I want to consider whether the diversity of management teams – and the inclusivity of the management culture they create – could be part of our consideration of senior manager applications.

We also need to look hard at the way capital markets work.

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.

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.

Many investors are already taking the lead in this area. One leading investment bank will only underwrite IPOs in the US and Europe where the company listing has at least one diverse board member. They said they would raise this target to two diverse candidates for each IPO client next year.

I would encourage all capital markets participants to consider the reasons why there are so few female CEOs and CFOs or CEOs and CFOs of colour presenting during IPOs or when capital is being raised – are there challenges in the culture of private equity, underwriting, equity syndication? What more can we do to sponsor and celebrate female business leaders and entrepreneurs?

As an employer, we are determined to improve our own diversity and to work on our culture to ensure it is inclusive.

As a regulator, we want the same from the firms we oversee and in the markets we regulate. Not because it is a social good – although, frankly, that should be enough. We care because diversity reduces conduct risk and those firms that fail to reflect society run the risk of poorly serving diverse communities. And, at that point, diversity and inclusion become regulatory issues.

Source: FCA

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