FCA criticises FIs for ‘generic’ DE&I policies that lack ‘clear purpose’

Report from the UK financial regulator comes as listed companies prepare to meet mandatory targets on board diversity next year.

Following the introduction of mandatory diversity, equity and inclusion board disclosure for listed companies earlier this year, the UK’s Financial Conduct Authority (FCA) has published research on DE&I in financial services.

While the findings showed some improvement on companies implementing DE&I initiatives, the regulator accused many of not doing enough and identified an “overreliance” on these schemes.

“Many firms’ strategies were generic and did not take a holistic view,” the FCA said. “They lacked both a clear articulation of purpose and actions oriented to achieving their goals. Firms were not fully capitalising on the data they collect to identify the best remedies, nor tracking which remedies are most effective.”

The FCA’s research stressed the importance of real systemic change to companies, noting that initiatives alone will not solve the problem.

Mandatory targets and reporting obligations on board diversity in gender and ethnicity are set to come into force in the UK next year. The targets, which will be imposed on a “comply or explain” basis, include: a board comprising at least 40 percent women (including those self-identifying as women); a woman holding at least one of the senior board positions (chair, CEO, senior independent director or CFO); and at least one member of the board from a non-white ethnic minority background.

UK listed companies whose financial years started on 1 April 2022 will be expected to disclose their DE&I data in April 2023.

Despite the rapidly approaching reporting deadline, the FCA’s research found that “very few firms seemed to have understood diversity and inclusion as a fundamental cultural issue”, and identified a lack of effort for building inclusive cultures within organisations.

The findings revealed that companies are unclear on their business rationale for better DE&I, with only one firm making the connection between diversity of thought and the benefits this could bring to a company.

The report stated: “Without a clear understanding of why firms are undertaking these efforts, there is a risk that diversity and inclusion is seen as an optional extra or that staff become fatigued and disengaged by ongoing initiatives.”

Most analysed companies typically started serious efforts on DE&I in 2019 or 2020, but were found to be still be struggling to take a holistic approach.

“On both gender and ethnicity, firms tend to focus most on improving representation at senior leadership level,” the FCA said. “This is despite data showing that the biggest drop-off in representation is from junior to middle management grades.

“Such focus, in isolation, risks creating a culture where firms attempt to ‘poach’ diverse senior talent rather than develop their own pipelines. This is not a sustainable approach and is unlikely to bring meaningful, long-lasting change.”

The research found that most firms focused only on gender and ethnicity in their DE&I strategies, overlooking social mobility, sexual orientation, disability and neurodiversity.

Last month, a report by the City of London Corporation-led Socio-Economic Diversity Taskforce found that just 36 percent of senior leadership positions in the UK financial and professional services sector were held by people from a low-socioeconomic background. The governing body has set a target for 50 percent of senior leaders to be from a working-class or lower socioeconomic background by 2030.

ESG advisory committee

Today the FCA announced the creation of a new ESG advisory committee to its board.

The committee will aim to provide guidance to the board on emerging sustainability themes and offer views on how the regulator should develop its ESG strategy. It will also support the board with its work on relevant ESG issues.

Appointees to the committee include: Tom Gosling, executive fellow in the Department of Finance at London Business School and executive fellow at the European Corporate Governance Institute; Catherine Howarth, chief executive of ShareAction; Tim Mohin, former chief sustainability officer at Persefoni AI and formerly chief executive at the Global Reporting Initiative; Desiree Fixler, founder of RYSN Consulting and chair of VentureESG; Sonali Siriwardena, partner and global head of ESG at Simmons and Simmons; and Harald Walkate, senior fellow at the Center for Sustainable Finance and Private Wealth at the University of Zurich.

Tom Gosling said: “I’m very pleased to have the chance to provide insights to help the FCA develop and deliver its ESG strategy in a way that brings tangible benefits to consumers and markets. I think it’s a good initiative that gives the FCA access to a diverse range of external experts.”

The committee will also include the FCA’s chair, Ashley Alder; director of ESG, Sacha Sadan; and other non-executive directors.