Can financial services institutions “adequately respond to [consumer needs] if they do not have the diversity of background and experience required to overcome biases and blind spots?” Has the economic impact of the Covid-19 pandemic made the demand for diversity even more urgent?

Financial Conduct Authority (FCA) CEO Nikhil Rathi posed these questions in March upon the annual review of the HM Treasury Women in Finance Charter. The charter, established in 2016 in response to the findings and recommendations in Jayne-Anne Gadhia’s report, “Empowering Productivity: Harnessing the Talents of Women in Financial Services,” represents a commitment by HM Treasury and signatory organisations to build a more fair and inclusive work environment in the financial services industry.

The charter stems from the recognition that diversity is more than simply the right thing to do; it is also good business. Now, it seems that an inclusive and equitable industry—one that embraces diversity across gender, ethnicity, and other characteristics—is on track to become a regulatory issue as well.

Increasing diversity, reducing risk

Rathi points to research that supports a strong business case for corporate diversity, even as a continued lack of ethnic and gender diversity questions firms’ “ability to understand the different communities they serve, and their different needs.” Furthermore, he says, “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.”

He calls for the addition of a sixth conduct question to the charter, one that will measure both the diversity of a firm’s management team and the inclusivity of its environment. He also notes that the FCA is working with the Prudential Regulation Authority to clarify regulatory expectations regarding the results of such efforts.

The FCA will also need to design a clear set of metrics to expose financial services firms’ culture and key decision makers (including chairman, CEO, and board) if they fail to meet these expectations. Only by holding firms to account can regulators hope to initiate real change.

Fortunately, the FCA has a unique lens on such processes, thanks to historic experience with the UK Approved Persons Regime and its newer incarnation, the Senior Managers and Certification Regime. The regime aims to reduce harm to consumers and to strengthen market integrity by enabling firms—and regulators—to hold firms and senior management to account.

Lost candidates, lost opportunity

Ultimately, the enforcement of accountability for incorporating greater diversity and inclusion can both improve firms’ risk-management culture and decrease the frequency of European banks’ misconduct fines. But will financial services organisations be able to meet regulators’ expectations within a one- to two-year time frame?

Rathi encourages capital market participants to consider the underlying reasons for the absence of women and people of colour in the boardroom and C-suite. Gadhia’s research found that women either did not progress to senior management roles or left the sector not because of a lack of childcare or related benefits—packages which have become increasingly competitive and favourable since 2016—but rather because of a hostile corporate culture and poor leadership behaviours. For all the rhetoric and high-profile initiatives that big banks and other financial services businesses have launched during that span, the upper echelons of many financial services businesses remain as disappointingly homogenous today as they were almost 20 years ago.

With such entrenched issues in succession planning and a high level of middle-management attrition, even the most willing firms might be challenged to quickly promote diverse talent to the executive level. Even though efforts to increase gender and ethnic diversity at the graduate and associate levels are seeing modest success, those candidates are realistically at least 20 years from having the experience typically deemed necessary for a C-suite position.

3 steps to take—today

To maintain good standing with regulators, financial services institutions will need to do more than voice a commitment to diversity. Now is the time for bold action and creative thinking. The industry’s response to the ever-changing demands of the past year have proven that significant changes to both corporate processes and culture can happen—and happen quickly—when firms are willing to face difficult issues and make decisive moves in response.

Diversity programmes, officers, and networks serve a certain purpose. So do mentoring and coaching programmes. Unconscious bias training, recruitment programmes, and well-designed benefits packages are all important. But these steps have barely put previous diversity goals within reach for most organisations. How likely are they, realistically, to meet even more stringent demands?

Rather, firms need to address the weaknesses of archaic, hierarchical workplaces; reassess their core values; and root out poor behaviour that discourages a diversity of input and representation. These actions will require a true shift in culture. Three components will help financial services organisations take positive, measurable steps to increase diversity and decrease risk:

• Take a big-picture view of diversity. The more representation you have—across gender, ethnicity, ability, sexual orientation, and social strata—in every level of the firm, including the executive level, the broader the spectrum of views and input you gain. These perspectives can help you more readily identify and challenge the outdated thinking and unhealthy behaviours that increase risk.
• Take advantage of technology. The rapid shift to digitalisation we’ve seen over the course of the pandemic enables firms to redesign their offerings to appeal to and connect with more groups than ever. Consider targeted, digital delivery of education, products, and services in investing, wealth management, insurance, home ownership, and more to a variety of audiences and locales. Increasing the diversity of your customer base can further promote inclusion of stakeholders who understand and connect with those audiences.
• Advance talent at a rapid pace. Focus energy on moving diverse talent directly from management roles into the C-suite. Avoid the mid-career loss of such talent by creating targeted pathways to executive positions. Create a team structure that enables successful ascension, even for those who would be three to five years from that step in a traditional hierarchical organisation. Scout such talent in those currently filling roles two levels below the C-suite. In the meantime, maintain recruitment efforts to keep a steady pipeline of diverse talent at all levels of the organisation.

Making a cultural shift of this magnitude takes time. Don’t tolerate poor behaviour. Don’t be daunted by the scope of the effort, but do establish specific metrics to assess breakthroughs and gains—or lack thereof—as you work to improve diversity and inclusion at your organisation.