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The FCA’s ongoing focus on improving D&I in the industry is tied to its observation that healthy workplace cultures not only support staff wellbeing and business performance but the delivery of ‘better outcomes’ for consumers. The language used by the FCA around this subject mirrors that of Consumer Duty, signalling that the regulator sees D&I as integral to good business practice and not a ‘nice to have’.

This is reinforced by the FCA’s 2022/23 business plan, which proposes to embed environmental, social and governance (ESG) considerations such as D&I into the authorisations process. In addition, the FCA recently published a wide-ranging Discussion Paper on ESG (of which D&I forms part), and a more detailed joint consultation on D&I in the financial sector from the FCA, PRA and BoE is expected in 2023.

To help firms take a proactive approach on D&I pending a formal policy position from the regulator, we have provided a high-level summary below of the FCA’s latest research on the subject and the key takeaways. In essence, the FCA wants firms to move away from a tick-box mentality and towards more open dialogue and impactful interventions.

We encourage firms to review these findings and incorporate any learning points into their own D&I policies. Appendix 1 of the FCA research lists some common interventions reviewed and their likely impacts as a guide (alongside examples of counterproductive interventions as well).

Latest FCA research: purpose and objectives

1. To help firms understand progress made on D&I and the work still to do,
2. To encourage further industry action, and
3. To shape the FCA’s ‘supervisory approach’ on D&I.

The latter is especially noteworthy, given we have yet to see the FCA issue a comprehensive framework for best practice on D&I (as they have done with vulnerability for example).

So, this research and its conclusions could be seen as the foundation for a more formal set of guidance coming down the track.

Findings and recommendations

It should be noted that the research was conducted across large firms only, so some observations here may not be relevant to smaller firms.

Focus

• Gender representation was the biggest area of focus.
  • Ethnicity was starting to receive attention.
  • Far less attention was being paid to other diversity characteristics.
• Efforts to improve representation tended to be concentrated on senior leadership level roles, rather than taking a firm-wide approach.
• The FCA perceived a risk of firms ‘poaching’ diverse talent from competitors instead of creating internal development pipelines.

Recommendations:

The FCA would like to see a more sustainable approach where interventions seek to improve representation at all levels – especially junior and middle management where representation sees the steepest drop-off. A wider set of diversity characteristics needs to be considered, and interventions need to have meaningful impact and move beyond ‘performative’ gestures. Firms also need to ensure they are creating progression routes internally and not simply filling quotas at senior leadership level.

Strategy

• D&I interventions do not tend to reflect the real-world challenges a firm may be facing – they tend towards the generic.
• Interventions are frequently implemented without a means of monitoring progress and effectiveness – the FCA appreciates D&I initiatives may take longer than a couple of years to have a meaningful impact, but an absence of monitoring makes gauging success hard.
• The FCA also saw an ‘overreliance’ on non-specific measures such as training, networking groups and allyship (i.e., where non-marginalised individuals are encouraged to champion the interests and voices of minority or marginalised groups).

Recommendations:

The FCA would like to see firms providing more tailored support based on feedback and data and move away from standardised interventions. This might mean paying closer attention to the lived experiences of current employees and responding to their needs. Firms should also track the impact of any interventions they make and use their findings to guide future action. Again, this very much echoes the ethos of Consumer Duty, which requires firms to adopt an iterative learning process where ongoing adjustments are made in response to feedback.

Data quality

Findings:

• Data quality was found to be highly variable and inconsistent. At the root of this was mixed success with ‘staff declaration rates’ – i.e. staff willingly disclosing diversity characteristics to support D&I monitoring and interventions. This may also explain firms’ focus on characteristics that can be tracked without the need for staff to disclose private information about themselves.
• Low declaration rates were not a foregone conclusion however – some firms had high levels of staff declaration as they had built up strong trust and a culture of openness.
• Poor data quality was linked to a lack of insight into how intersecting characteristics impacted on staff experiences and outcomes, e.g. where employees meet several diversity criteria, how do their experiences differ from peers who only meet one or none? Again, knowing the unique challenges faced by real-world employees would help firms drive more meaningful impact.

Recommendations:

Firms should concentrate on building trust and understanding before embarking on any data collection activity. In-depth multi-faceted data gathering is important for generating actionable insights, but such data is unobtainable if people do not feel comfortable disclosing it. This point also reinforces the need to look at a wider range of characteristics, e.g. female employees may face vastly different challenges depending on age, seniority level, ethnicity and socioeconomic background.

Accountability

Findings:

• The majority of firms reported that diversity and inclusion targets could have an impact on pay and bonuses.
• However, how this worked in practice was often not clearly defined.

Recommendations:

Where D&I targets or initiatives are in place, senior leaders should be held accountable for their delivery. Where applicable, the issue should be raised and discussed at Board level, with Board challenging on key issues if necessary. If pay and bonuses are notionally tied to the delivery of outcomes, firms should be able to articulate how this works in practice, i.e. what outcomes or behaviours would impact on a performance grade or remuneration package.

Closing comments and next steps

AMI will continue to monitor FCA policy and commentary in this area, and report back on any action points for firms. We are also committed to the delivery of our D&I initiative on behalf of the wider mortgage sector in conjunction with IMLA. This includes the establishment of an industry-wide mentoring scheme, which will be free to access and open to everyone wishing to start or develop their career in mortgages.