Global menu

Our global pages


Why diversity and inclusion are regulatory issues

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management


Why are diversity and inclusion (D&I) regulatory issues? Nikhil Rathi, CEO of the UK Financial Conduct Authority (FCA), addressed this question in a recent speech at the launch of the HM Treasury Women in Finance Charter Annual Review. As Rathi makes clear, the FCA cares about D&I “Not because it is a social good – although, frankly, that should be enough. We care because 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”.

Many will be familiar with the ‘business case’ argument for diversity. According to research by McKinsey, the most diverse companies are 35% more likely to outperform the least diverse. However, the business case for greater diversity would appear to extend beyond performance. Rathi also cites research which suggests that greater gender diversity improves risk management culture and has decreased the frequency of misconduct fines imposed on European banks. In light of such evidence, it is unsurprising that the FCA sees D&I as falling squarely within its remit as a conduct regulator.

The FCA’s view is that diversity is crucial to the delivery of good customer outcomes and the consideration of customer vulnerability, particularly in view of the impact of the pandemic on women and people of colour. Rathi notes that the lack of diversity at the top of financial services firms “raises questions about firms’ ability to understand the different communities they serve, and their different needs”. He adds, “I would question if any firm can adequately respond to the needs of these consumers if they do not have the diversity of background and experience required to overcome biases and blind spots”. Improving D&I is “both a matter of fairness and a crucial way to strengthen consumer outcomes”.

In September 2020, noting the limited progress to date, the FCA emphasised that it would be increasing its focus on D&I over the coming year and firms would need to move beyond a policy-led approach by taking action and monitoring the effectiveness of those actions to assess if the changes they implement are delivering tangible outcomes. Rathi’s comments build on this: he emphasises that the FCA will increasingly be asking firms ‘tough questions’ about representation, inclusivity and whether their culture provides a safe space for colleagues at all levels. Notably, Rathi comments: “In the years ahead, if we don’t see improvements in diversity at senior level and better answers, we will also consider how to best use our powers. This is something we will consider over the next year … There are supervisory tools we can draw on. For example, I want to consider whether the diversity of management teams – and the inclusivity of the management culture they create – could be part of our consideration of senior manager applications”. To help focus the minds of senior managers on culture, including D&I, and conduct risk, Rathi suggests that firms should consider the following question: “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?”

It is clear that the FCA sees D&I as central to its work on culture, which is a key aspect of its efforts to drive up standards of behaviour in financial services. Firms should, therefore, expect to see greater intervention from the FCA on D&I issues during the authorisations process and through supervisory engagement.

Does the regulator, however, have the right tools to bring about meaningful change on D&I? Georgina Philippou, Senior Advisor to the FCA on the Public Sector Equality Duty, touched on this point in a recent speech in which she commented, “there is no rule in our Handbook that says regulated firms have to be diverse or even have an internal or external diversity policy. But that doesn’t mean we are silent or powerless … we have a range of tools at our disposal, from formal to informal and in particular, we have a unique power to influence and convene – to get people round that dinner party table”. It remains to be seen whether the FCA will consider introducing a requirement for firms to encourage diversity and inclusion in financial services. This would be a radical development and, while we have seen no indication that such a step is under active consideration, there is a precedent for such a requirement in the legal sector, under Solicitors Regulation Authority Principle 6 (which requires solicitors and law firms to act “in a way that encourages equality, diversity and inclusion”).

In his speech, Rathi noted that the FCA is working with the PRA on formalising a joint regulatory approach to D&I. We wait to see how far the regulators are prepared to go to deliver real change in this area but in light of recent developments, firms should be left in no doubt that D&I is far more than an HR issue or a ‘nice to have’. Now more than ever, it is critical that firms treat this as a regulatory imperative and take appropriate steps to embed D&I into the way they conduct their business.

For more information, please contact: