On 17 March 2021, the CEO of the Financial Conduct Authority (FCA), Nikhil Rathi, gave a speech at the launch of the HM Treasury Women in Finance Charter Annual Review.
The CEO noted that the FCA and the Prudential Regulation Authority are developing a joint approach to Diversity & Inclusion (D&I) for all financial services firms.
Mr Rathi set out some of the broad areas in which the FCA is focusing on D&I in its approach to regulation in the UK.
Holding Firms to Account
As part of the introduction of the Senior Managers Regime (SMR), the FCA introduced 5 conduct rules that Senior Managers must meet. These include obligations to ensure that Senior Managers take “reasonable steps” to ensure the part of the business they manage does not engage in any regulatory breaches.
In the Speech, Mr Rathi said that he would like a sixth rule added for all firms that asks “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?”.
Mr Rathi noted that this question is broader than representation. It tests how positive a regulated firm’s culture actually is. Relating not just to diversity but inclusion, the imposition of this standard would enable cultural change and empower staff from all different backgrounds to feel confident in speaking up.
According to Mr Rathi, if the FCA does not see improvements in diversity at senior levels, the regulator will consider how best to use its statutory powers. For example, he suggested that considerations of the diversity of a management team and the inclusivity of the management culture they create could be part of the FCA’s consideration of Senior Manager applications under the SMR.
Listing Rules
Mr Rathi also noted that the FCA is considering whether D&I should be part of the FCA Premium Listing Rules. He noted that many investors and exchanges - such as Nasdaq - are already taking positive steps in considering D&I when it comes to listing and investment. Mr Rathi encouraged 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 and whether there are challenges in the culture of private equity, underwriting and equity syndication.
At a broader level, Mr Rathi concluded by noting that poor D&I outcomes result in conduct risks by those firms that fail to reflect society. These firms also fail to serve diverse communities. And, at that point, D&I failings become regulatory issues.
The FCA will increasingly be asking tough questions to regulated firms about representation across grades and whether their culture is open, inclusive and provides a safe space for colleagues at all levels of the organisation.
DLA Piper Broader Observations
These initiatives form part of a broader movement across society, politics and business to create a more inclusive culture in communities, professions and the public sphere. In light of the increasing focus on ESG, it is notable that a number of firms have turned their attention to improved portfolio alignment, applying pressure for example, to improve diversity on boards of investee companies, as well as paying attention to corporate social responsibility. This all makes a great deal of sense, given that there is considerable evidence to highlight improved returns on investment and greater resilience within portfolios that demonstrate stronger D&I metrics. Focusing on such matters in investment activities but failing to reflect these values in-house would be a clear case of “physician, heal thyself”. We are already noting an uptick in legal and compliance advisory work in this area, with intense media focus and an active disputes horizon and we anticipate that the regulator will become increasingly engaged as these risks intensify.
and then 