Diversity and Inclusion in Business: Financial Imperative
Thursday, December 21, 2023
Advancing Diversity in Business: A Financial and Consumer Imperative
Diversity within businesses is increasingly recognized not just as a moral imperative but as a catalyst for financial and consumer success. Studies in the financial sector have shown a positive correlation between diversity in senior management and favorable business outcomes. However, there's still significant progress to be made. Despite advancements, substantial gender and ethnic pay gaps persist, and diversity at the top echelons of leadership remains inadequate.
Addressing these gaps, the UK Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) released consultation papers on September 25, 2023, proposing a new regulatory framework for diversity and inclusion (D&I) in the financial sector. These proposals, building on a joint discussion paper from July 2021, aim to enhance D&I in financial services. While both the FCA and PRA's proposals are largely aligned, the PRA includes additional requirements for dual-regulated firms, particularly concerning senior management accountability.
Learn more about advancing diversity in article: Promoting Diversity and Gender Pay Equity: EBA's Benchmarking Guidelines for Financial Institutions
Key proposals include mandatory reporting and disclosure of D&I data, establishment and maintenance of a D&I strategy, setting diversity targets, recognizing the lack of D&I as a non-financial risk, and embedding non-financial misconduct (NFM) within the FCA Handbook's Conduct Rules and other assessments.
Nikhil Rathi, CEO of the FCA, emphasizes that diversity and inclusion are crucial for competitive and well-managed UK financial services. The focus extends beyond the nine protected characteristics under the Equality Act 2010, aiming to foster diversity of thought — a blend of different perspectives, skills, and knowledge that enhance problem-solving and decision-making.
The FCA and PRA's proposals mandate firms to develop evidence-based D&I strategies overseen by their boards. These strategies should include objectives, goals, progress monitoring plans, and measures to identify and manage obstacles. Firms will also need to set targets to address underrepresentation and are encouraged to report on progress against these targets.
Additionally, firms are required to collect, report, and disclose D&I-related data, including a range of demographic characteristics and inclusion metrics. This data collection is integral to identifying intervention areas, setting appropriate targets, and ensuring accountability.
The proposals also focus on individual accountability, particularly under the PRA's framework, which expects senior management to take responsibility for D&I. Both regulators view the lack of D&I as a non-financial risk that should be addressed across various functions within a firm's governance structure.
The consultations are open until December 18, 2023, with the FCA expecting to publish final regulatory requirements in 2024, followed by a 12-month implementation period. The PRA's timeline is anticipated to be similar.
These steps represent more than just a starting point; they signify a significant stride towards embedding diversity and inclusion into the fabric of financial services, ensuring that firms not only embrace diversity but also create environments where every individual can participate freely and contribute meaningfully.
