FCA CEO says diversity and inclusion are regulatory issues

This week’s speech by FCA CEO Nikhil Rathi – Why diversity and inclusion are regulatory issues – emphasises how central diversity and inclusion are to the creation of a positive culture, for regulated firms and listed companies.

The speech builds on previous statements to draw out two key points that firms – and their Boards – will need to build into their diversity, culture and conduct initiatives.

1. The FCA regards diversity and inclusion within financial services firms as an essential element in driving improved customer outcomes. A diverse and inclusive culture creates an environment where firms properly understand the differing needs of their customers and reflect those in product design, customer service, and customer communications. Firms will need to consider what steps are required to make sure that diverse voices are being heard and reflected at each stage – and whether outcome testing and complaints analysis allow this to be tested.
2. Firms – and their Boards – can expect to be challenged if progress is not made towards diversity at all levels, with the FCA asking about representation across grades and whether their culture is open and inclusive. Mr Rathi's suggested a sixth question to add to the existing five conduct questions for wholesale banking: 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? In addition, the FCA is considering a move towards a “comply or explain” approach, to increase diversity at board level by requiring firms seeking a premium listing to have at least two diverse directors. As the speech acknowledges, if it did so the FCA would not be breaking new ground: Nasdaq adopted similar rules last year, and in other markets market participants have been moving towards such practices on a voluntary basis.

We have seen an increasing focus on diversity and inclusion from clients in recent years, and Mr Rathi's speech makes clear that this is an area where firms can expect regulatory scrutiny if progress is not made. Within our risk advisory practice we can draw on our extensive regulatory experience to advise firms on how to build diversity and inclusion into decision making processes. In addition, our dedicated Diversity Faculty was launched in October last year to support clients in navigating the legal, regulatory and governance issues that can arise in devising and delivering an effective diversity and inclusion strategy.