Matthew Connell examines what the regulatory discussion paper on diversity and inclusion means for the financial planning profession
In July, a joint discussion paper (DP) by the Prudential Regulation Authority (PRA), the Bank of England and the Financial Conduct Authority (FCA) was launched. Focusing on diversity and inclusion (D&I) in the financial services sector, the paper makes clear that the regulators want to play their part “in addressing the negative impact” of inequalities within financial services. This action, they say, includes “prompting” firms they regulate to “do more – more quickly – to improve diversity and inclusion within their own workforces”.
A core focus for the regulators is leadership, as it is their view that effective change comes from the top and that only by changing the culture of financial institutions can you best drive forward inclusion. Therefore, alongside the discussion paper – the regulators have also launched a consultation focused on boards and executive committees, as well as the governance structures used to improve D&I within firms.
As often is the case, the discussion paper is a bit of a tome, so I want to reflect on some of the key discussion points and proposals the regulators explore within it. Some of these will have a direct effect on the financial planning profession, others may not affect everyone, but provide a signal as to where the regulators and future regulation are heading.
One discussion point focuses on tying renumeration practices into the need for effective D&I policies and practices. Although, it is fair to say both PRA and FCA remuneration policies include a requirement for firms to base variable remuneration awards on financial and non-financial performance for their Material Risk Taker population. Within this, there are already organisations that link D&I progress to the objectives of senior managers – through renumeration scores.
The regulators want to explore how the use of these scores, linked with variable renumeration, could be put in place for all senior managers and executives. There is also the possibility of making this a commonality between both fixed and variable renumeration – ensuring renumeration does not give rise to discriminatory practices.
There is an expectation that firms have the foundations of a strategy to deliver on D&I. Without being too prescriptive of content and length, the regulators believe these need to be clear and consistent, setting out exactly how the organisation expects staff at different levels to work towards an inclusive working environment.
Obviously, there is an understanding of the need for proportionality, but even for the smallest of firms a clear simple message on how they are inclusive is deemed important to regulators and is potentially something to look out for on the horizon.
Not only is the regulatory focus on boards, executives and senior managers, but also on customer-facing roles. Part of the discussion wishes to elicit views on how targets could be used for these roles to not only ensure customers can see and experience diverse individuals when contacting a firm, but a variety of consumer needs are therefore met because of a more diverse customer-services team. This ties into a wider belief – the more inclusive an organisation is, the wider its target market is and therefore, the more it can do for a wider pool of customers.
Of course, there is already existing guidance from the FCA with regards to inclusive consumer practices – its recent vulnerable customer guidance is a strong example of this. In addition to this and existing handbook principles, PFS members are all signed up to a code of ethics on treating customers fairly. Many have gone further by also signing up to the Financial Vulnerability Taskforce Charter, alongside other measures, and embracing the expectations we have for Chartered firms.
Ultimately, while the regulators recognise that providers cannot produce products and services for everyone, they maintain that they should ensure to the fullest they do not define their target markets in a way that results in unlawful discrimination under the Equality Act 2010.
While D&I is already examined as part of assessing a firm’s culture, the regulators’ vision is to embed it into the principles of their supervision of management and governance
Apart from the obvious discussion on improving the diversity of senior managers themselves, expanding existing regulation was also mooted as an area that could help set a firmer framework on inclusion.
Fitness and propriety
All senior managers and certified persons must be “fit and proper” under the Financial Services and Markets Act 2000 (FSMA), before they can carry out a controlled or certified function. This also includes having regard for an individual’s honesty, integrity and reputation.
But there have been some instances of non-financial misconduct in the past, so the regulators propose providing guidance on what non-financial misconduct entails and outlining how this would also capture instances of bullying, sexual harassment and discrimination based on protected (or otherwise) characteristics. Firms would then be expected to determine if there was a breach of the rules of conduct and disclose this in future regulatory references. As part of this system, there would also be guidance on how such behaviour, or a failure to act on it, would constitute a breach of conduct rules.
While D&I is already examined as part of assessing a firm’s culture, the regulators’ vision is to embed it into the principles of their supervision of management and governance. Therefore, firms can expect supervisors to ask more questions about how they are embedding diversity across their businesses and creating a culture of inclusion, as well as D&I being a regular part of a supervisor’s engagement with senior management and the board.
In understanding equality, diversity, and inclusion, it is important we all recognise the need to ensure relevance and proportionality
The scope of this future regulatory focus applies to the broadest range of firms, including those with Part 4A permission under the FSMA to carry on one or more regulated activities. However, there is a recognition of the need for proportionality, as some of the examples given by the regulators in their paper would be better suited to large firms rather than small ones.
Discussing the need to avoid a one-size-fits-all policy is an interesting one and diverges from previous approaches by regulators, who often see proportionality as a dilution of regulation, rather than what it really is – a more effective approach to regulating financial services.
This is also of particular importance and relevance to financial advisers, as smaller firms are often treated with the same expectations as larger ones. In understanding equality, diversity and inclusion, it is important we all recognise the need to ensure relevance and proportionality. In some cases, a one-person organisation cannot change its staffing makeup, but it can refocus its marketing and communications to be more inclusive and reach a more diverse range of customers. While this may be a commercial consideration, it is just as important if we are to ensure there is an inclusive customer proposition as well as an inclusive staff proposition.
All in all, there is a mixture of new ideas and proposals, as well as a recognition of existing frameworks and expectations and how best to utilise them to affect the change needed. The PFS will continue to provide support and guidance to members on how best to comply with any of these new regulatory expectations, as well as signposting existing guidance on building inclusive workplaces and customer propositions.
Matthew Connell is director of policy and public affairs of the PFS
Image credit | Ikon