In a discussion paper, the regulators have set out policy options including, among others, the use of targets for representation, measures to make senior leaders directly accountable for diversity and inclusion in their firms, linking remuneration to diversity and inclusion metrics and the regulators’ approach to considering diversity and inclusion in non-financial misconduct. The discussion paper also focuses on the importance of data and disclosure to enable firms, regulators and other stakeholders to monitor progress.

The regulators believe that increased diversity and inclusion will advance their statutory objectives by resulting in improved governance, decision-making and risk management within firms, a more innovative industry, and products and services better suited to the diverse needs of consumers.

Philippa Kelly, ICAEW’s Director Reputation and Influence Business Group said: “The societal importance of the financial services industry can’t be underestimated, and the industry should represent the society it serves. Regulators have a key role in supporting the changes needed to make this happen.”

How remuneration can be linked

Linking progress on diversity and inclusion to remuneration could be a key tool for driving accountability in firms and incentivising progress. All 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 (individuals who can materially affect the risk profile of the firm).

The HM Treasury Women in Finance Charter: annual review 2020 finds that firms are increasingly linking D&I to the personal objectives of senior management (through remuneration scorecards for example), and through a collective objective for the firm or business unit. A total of 95% of signatories have reported that they believe the link to remuneration to be effective.

One step forward and two steps back

Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA said: “While some progress has been made to improve diversity and inclusion in parts of the financial services sector over the last decade, the discussion is still in its early stages, and more needs to be done to speed up progress.”

The 2021 Women in Finance Charter Annual Review reported very little progress showing that in 2020 there was, on average, 32% female representation in senior management amongst charter participants, showing an increase of less than one percentage point year on year from 2017.

However, the situation for ethnic minorities shows signs of going into reverse. Early findings from the Green Park Business Leaders Index (2021) show a decline in the number of Black leaders and the ‘Black pipeline’ to senior management for FTSE 100 companies. Fewer than 1 in 10 management roles in financial services are held by Black, Asian or other minority ethnic people. There is also limited progress with social mobility. A deep dive study of 8 financial firms (including regulators) found that 89% of senior roles are held by people from higher socio-economic backgrounds.

Starting a new conversation

In response to this progress, Woods added: “The paper we have published is intended to start a new conversation with firms about how we can best move forward across the sector, while we also take steps to improve diversity and inclusion within our own organisations. I encourage firms and other interested stakeholders to give us their views on our proposals.”

ICAEW’s Philippa Kelly commented: “This is a timely discussion, as firms assess the progress of recent efforts on diversity and inclusion, as well as the impact of the pandemic on the workforce.”

To assess progress, the authorities are proposing collecting data from firms about their workforce. Prior to this, there will be a one-off, pilot survey later this year which will help to develop the proposals set out in the discussion paper and test how firms’ can provide data with a view to considering regular reporting in the future.

The regulators are also asking for views on how any changes could be tailored to specific categories of firms to ensure it is proportionate. The discussion paper is open until 30 September 2021. The feedback and data received will be used to develop detailed proposals, with a joint consultation planned for Q1 2022. 

ICAEW is responding to the discussion paper and members who would like to contribute to the response are invited to email fsf@icew.com. 

ICAEW’s Diversity and Inclusion hub brings together timely resources on regulation and equality, along with our latest insights into diversity in the profession.

Related article for members: Businesses must be bold and transparent in their commitment to diversity and inclusion