Opening up and speaking out: diversity in financial services and the challenge to be met

Speaker: Christopher Woolard, Executive Director of Strategy and Competition
Location: Ropemaker Place, London
Delivered on: 19 December 2018

Highlights:

• The debate has moved well beyond diversity as a ‘nice to have’ – it is now increasingly recognised as a commercial imperative for firms.
• But while things are moving in the right direction, progress has been slow – our stats show the percentage of women at the senior management level below the Board has increased only 1.5% over the last 10 years.
• How a firm approaches diversity and inclusion tells us a lot about its culture. And the way firms handle non-financial misconduct, including allegations of sexual misconduct, is potentially relevant to our assessment of that firm, in the same way that their handling of insider dealing, market manipulation or any other misconduct is.
• In fact, over the last 12 months, we have seen a noticeable upturn in reports which concern issues like discrimination and sexual harassment in financial services. Our message to firms is clear: non-financial misconduct is misconduct, plain and simple.

Note: this is the speech as drafted and may differ from the delivered version.

Introduction

Way back in 1951, Solomon Asch, a pioneer of social psychology, conducted an experiment that would confirm his place among the field’s greats.

Interested in how our decision-making is influenced by others, he asked a group of college students to judge the relative lengths of different lines on a sheet of paper.

What the students didn’t know was that there were stooges amongst them, who had been instructed to give blatantly wrong answers.

How did the students react in the face of a false consensus? Despite the evidence in front of them, around 70% of them went along with it.

What can a psychology experiment in 1950s America teach us about diversity in financial services in 2018? The lesson is startlingly clear: striving to be the same as everyone else can keep us from the truth that’s staring us in the face.

And that can mean that people keep quiet when they should speak up.

Why does Diversity and Inclusion (D&I) matter?

The risks of a false consensus should be apparent to all of us at this point – recent history has a lot to say about the dangers of not questioning the status quo, however unethical it may be.

But cultivating a diverse and vocal workforce is not just a question of mitigating the risk of groupthink – it is also potentially a competitive advantage to organisations.

I’m not just referring to the payback for recruitment and retention, though that’s significant. Or the power of looking around your workplace and seeing the whole of society reflected in it – and what that does for an employee’s motivation.

I’m talking about a commercial imperative – the power of diversity to help organisations make better decisions, to think in the long-term, to prosper.

After all, why wouldn’t you want to draw on the full experience, opinion and insight of your workforce? Comforting though it may be, shouting your own opinion loudly into an echo chamber never did much to advance the great questions of the day – just look at Twitter.

The real nuggets – the perspectives that make you stop and think – come from people who cause you to think differently. To look at something from a new angle or see something in a new light. So we need to get different voices around the table.

The key is different voices.

Deciding to incorporate, say, more women in your team, is not a silver bullet. Because if those women had similar upbringings, went to similar schools and had similar career paths, then it stands to reason that their thinking will be similar too.

So we need varied life experiences – race, age, social background, sexual orientation, education… the list goes on. True diversity comes when you’re open to – and make space for –  them all.

Because the ingredients you put into the mix, determine the dish that comes out.

Maintaining momentum on diversity

And to extend the metaphor, just a little longer, as a regulator we also need to eat our own cooking.

So before turning to talk about the wider regulation of the market, I wanted to say a little about what we are doing.

For us as a regulator, advancing the D&I agenda isn’t a slogan, but an essential part of how we go about our work. How can we represent the consumers we serve if we – the people who make the decisions that affect them – don’t understand their full experience?

So this is business critical for us.

We are an active participant in the Women in Finance initiative[1].

Unlike many of the participants, we already have a strong level of representation of women in our senior ranks, but we have to build on this, and we have set ourselves targets of 45% of our senior leadership team (SLT) to identify as female by 2020, and 50% by 2025.

We have also used this as an opportunity to reflect on where we could do better. As an organisation, we have relatively few senior leaders from a black, Asian, and minority ethnic (BAME) background. So we aim for 8% of our senior leaders to identify as BAME by 2020, rising to 13% by 2025.

I’m pleased to say we’re on track to meet these targets. In the year to March 2018, representation of women rose from 36% to 39%. We have also seen the percentage of our SLT who identify as BAME rise from 2% to 5% in the same period.

However, it would be wrong of me to claim we’ve ‘cracked’ diversity. Far from it. While we’re making good progress on our SLT targets, there is still more to do to ensure that we’re developing a diverse pipeline of talent who will lead the organisation in the future.

We’re doing a number of things – such as reverse mentoring of senior staff by BAME colleagues, sponsorship programmes, reaching out to recruit from a much wider pool of universities, expanding our apprenticeship programme and demanding more of our line managers, both when we recruit and in how they manage meetings day to day to ensure we hear the voices of all colleagues.

And we don’t see diversity as two dimensional around simply gender and BAME.

One area I feel particularly strongly about in this regard is social mobility. I grew up on two council estates and lived in a tower block until I was 10. Now I’ve been very fortunate in my career, but I know many other bright kids who didn’t make the same journey. One of the questions for us is how we as an employer can find talent from many different sources, build and sustain it.

This year we came 37^th in the Social Mobility Index, which recognises the organisations that are doing the most to ensure they are open to accessing and progressing talent from all backgrounds.

But it was disappointing to see that only 5 other financial firms featured in the index. In fact, where strides have been made by some firms around, for example, gender, industry is falling down when it comes to social mobility. This is especially true when compared to professional services like accountancy and legal, where we see significant efforts being made.

Whether or not this is down to the particular structure of those firms is a debate for another day – a recent Financial Times column posited that the ownership structure of accountancy firms "means partners have a personal interest in deterring behaviours that can lose their firm respect and business".

Whatever the particular motivations of a company, you can be sure that, beneath the surface, staff are alive to the debate and are watching their employers’ efforts closely.

This is something I’ve seen myself as chair of the FCA’s Executive Diversity Committee.  

Are we just paying lip service, or do our actions match our words? Can colleagues really bring their whole selves to work? Are we putting our money – and time – where our mouth is?

For example, in moving to Stratford, we built our new headquarters with disabled access at the forefront of our minds and recently won a Business Disability Forum ‘Disability-Smart’ award.

So the debate has moved well beyond diversity as a ‘nice to have’. It is now an essential part of how colleagues view the company in which they work. And they expect real commitment.

Pushing for more

Being able to talk about these issues openly is key to moving the ball forward and enacting real change.

Much progress has already been made.

But let’s not kid ourselves. Just because more people are talking about diversity than ever before, doesn’t mean that that talk is being matched by real action.

The figures speak for themselves.

My team has conducted analysis into the makeup of regulated firms over the last 10 years and early findings make for sobering reading.

On gender for example, stats show that the dial hasn’t really shifted that much.

Currently only 15% of directors and 6.5% of chief executive officers (CEOs) across our regulated population are women. And the percentage of women at the senior management level below the Board has gone from 14% in 2008 to only 15.5% in 2018 – a 1.5% rise, even as the issue of D&I has risen steadily up the agenda.

And while we’ve seen a marked increase in gender diversity in senior risk-management and compliance functions over the last decade, with a 30% increase, that still only brings the percentage of these roles held by women to 15%.

The reasons for this are various and complicated. But if we can’t be definitive about the exact cause, we do want clarity on the effect.

That’s why we plan to explore the relationship between diversity and firm behaviour, including misconduct, to understand if there is a link between the two.

Diversity as a supervisory priority

It should be clear by now that the FCA’s interest in diversity is not merely a matter of social justice, but a core part of how we assess culture in a firm.

The way we define culture is very simple – it is the typical behaviours that characterise a firm.

Firms which foster an inclusive and diverse culture open themselves up to a wide range of perspectives. That means less fettered, more productive internal debate. 

Where a culture is open, risks are flagged, experiences are shared and decision-making is enhanced. But in a culture where colleagues are afraid to speak up, unethical behaviour can gain a foothold.

So we take an interest in what firms are doing to promote D&I and will ask them about it in our regular engagements.

We are also committed to advancing the Public Sector Equality Duty, which requires public bodies to consider how their policies affect people who are protected under the Equality Act. This means we also challenge firms on their treatment of vulnerable customers.

And we consider D&I issues may have an impact on the fitness and propriety of senior managers.

The Senior Managers and Certification Regime (SMCR) is key in this. It ensures that senior executives are directly accountable for functions which fall under their responsibility and are ‘fit and proper’.

Indeed, there have been instances where either we or a firm we supervise have found an individual not to be fit and proper on the basis of their ‘non-financial’ conduct. The result being that they were unable to take up or continue in their role.

In our judgement, the way a senior manager approaches issues around diversity may be relevant to our assessment of their competence and character.

And the way firms handle non-financial misconduct, including allegations of sexual misconduct, is potentially relevant to our assessment of that firm, in the same way that their handling of insider dealing, market manipulation or any other misconduct is.

This is a message industry needs to hear.

After my colleague Megan Butler spoke out on non-financial misconduct in May, we received our highest number of disclosures from whistleblowers. Not just involving issues around gender, but also racism, physical bullying and homophobia.

In fact, over the last 12 months, we have seen a noticeable upturn in reports which concern issues like discrimination and sexual harassment in financial services. Our message to firms is clear: non-financial misconduct is misconduct, plain and simple.

While numbers are still small, they point to a striking trend. In 2017 our whistleblowing team received 20 reports of non-financial misconduct. This year we’ve received 64. And our suspicion is we have only scratched the surface.

Anyone involved in this debate needs to think through their response carefully.

We are seeing some firms take what they would regard as a zero-risk approach in response to #MeToo, which, rather than having the intended effect of making women safer in the workplace, I fear may see the re-emergence of cosy boys’ clubs and men-only networks. That misses the point.

In 2018, we might hope that all colleagues in a firm could be treated with respect by leaders as a matter of basic character. As the regulator, we will certainly expect so.

Our message to firms is clear: non-financial misconduct is misconduct, plain and simple.

Conclusion

We’ve come a long way since the conformity experiments of the 1950s and there’s a growing consensus over the need to nurture diverse, open cultures in financial firms and beyond.

But the job is by no means done. Hardened attitudes take a long time – and consistent, meaningful action – to remould.

I hope we all agree on the need for diversity, now let’s do the work to achieve it.