Culture in financial services has become a priority for both the PRA and FCA as well as government and select committees. It is recognised that culture is a key root cause of major conduct failings that have occurred within the industry in recent history. There is an expectation on firms to focus on fostering good culture, starting in the boardroom and with good behaviour to be embedded at all levels.
What is perhaps not as widely acknowledged is how equality, diversity and inclusivity form an important part of culture.
Findings and expectations
In 2015 the Government asked Jayne-Anne Gadhia, CEO of Virgin Money, to lead a review into the representation of women in senior managerial roles in financial services, focussing on the talent pipeline at the executive population below board level. Her review found that women made up only 14% of executive committees in financial services. In response to her recommendations, HM Treasury launched the Women in Finance Charter. Nearly 300 firms across financial services have since signed up to the commitments of the Charter, with signatories pledging to:
- have one member of its senior executive team who is responsible and accountable for gender diversity and inclusion;
- set internal targets for gender diversity in senior management;
- publish progress annually against these targets in reports on firm’s websites;
- have an intention to ensure the pay of the senior executive team is linked to delivery against these internal targets on gender diversity
Work on equality however has not progressed enough. Last summer the Treasury Select Committee published its report on women in finance calling for reform of bonus negotiations, promotion of flexible working and encourage the progression of women to senior levels. It found that “culture is the overwhelming reason that women said they do not want to get involved at the senior levels of the financial services sector, which becomes a self-reinforcing barrier.” The Committee’s key recommendations were:
- Assess bonuses against clear criteria to abolish ‘alpha-male’ culture
- Remove stigma of flexible working by senior men leading by example
- Encourage firms to publish strategies for closing gender pay gaps
- Partners and subsidiaries should not be exempt from gender pay gap reporting
- Firms should re-examine recruitment and promotion policies to eliminate unconscious bias, which will avoid potential applicants being deterred and avoid group-think
When this report was published, rather than a consensus of recognising there are issues and committing to make improvements, there were a disappointing number of dismissive and protective reactions. It is difficult to understand how even after a raft of investigations, research and evidence in recent years, not to mention the #MeToo movement, there are some who refuse to listen. The approach to addiction comes to mind: the first step to recovery is acknowledging there is a problem.
The requirement for employers with over 250 employees to publish their gender pay gaps has led to some firms trying to manipulate their figures by excluding partner salaries – i.e. looking for loopholes – whereas good firms published their figures with explanations and a strategy on how they will close the gap. It is not surprising that politicians are asking firms to adopt these practices as it obviously demonstrates a commitment to improving culture by encouraging the progression of women to more senior levels.
The Equality and Human Rights Commission (EHRC), the regulator of equality law if you will, last year published findings of its research into attitudes towards the gender pay gap. It found that 61% of women would take a firm’s gender pay gap into consideration when applying for a job; 58% are less likely to recommend their present employer if they had a gender pay gap; and 50% would reduce their motivation in their role and commitment to their employer. Interestingly, 75% of all respondents (both male and female) would be willing to take part in actions and activities to help their employers tackle the gender pay gap. The EHRC has urged employers to produce action plans with specific targets and deadlines alongside their pay gap figures.
All this research and recommendations highlight how equality is integral to culture. This has been echoed by the FCA who similarly expect firms to be focusing on equality and diversity as part of their culture. Megan Butler, Executive Director of Supervision, has said that firm culture should be “open minded, tolerant, considerate, and importantly, aspiring to improve.” The FCA has found that firms who promote diversity significantly lower their conduct risk. It therefore believes that “in order to drive change in financial services, we cannot exclusively focus on arguments around social justice – although it is clearly a matter of social justice. We need to call out the fact that diversity is fundamental to business success and to the reduction of failure.”
It is interesting that the FCA has actually found that firms with monocultures suffer 24% more governance-related issues than their peers. It attributes this to the fact that diversity helps groups from converging around poor decisions because, as behavioural science shows, it encourages different perspectives reducing the risk of group-think. People tend to change their own assessments to bring them into line with those around them, with some prone to excessively optimistic views of their own skills. Those groups therefore tend to be more close-minded, which is a classic trait in groups that lack diversity. The FCA therefore wants firms to have a culture that pursues diversity and as part of their work, supervisors are directly asking firms about their diversity policies. This includes questioning recruitment processes and the demographics of those who are hired, whether female graduates are rising through the ranks in equal numbers, what attention is being given to equal pay and the gender pay gap, and whether firms are doing more to promote environments that appeal to women and give them confidence.
Once firms adopt the right mindset in acknowledging the importance of equality and diversity, the next steps are for firms to understand what their legal responsibilities are and then what they can do to improve and promote diversity.
All firms have responsibilities as employers under the Equality Act 2010. This makes discrimination, harassment and victimisation because of a “protected characteristic” unlawful. Protected characteristics include race, disability, gender (including gender reassignment), age, pregnancy and maternity, religion or belief, marriage or civil partnership, and sexual orientation. This is not just limited to how employers treat their employees, but also that employees should be protected from this behaviour in the workplace. The #MeToo movement is just one example which has highlighted how victimisation in professional environments is not uncommon and how employers have failed to comply with their legal obligations (e.g. by dismissing an employee’s complaint of sexual harassment).
Equality and diversity therefore cannot be seen as a standalone issue: it forms part of a firm’s culture. With poor culture, by not treating staff equally individuals will feel marginalised and devalued in their workplace. This is compounded where incidents of victimisation and harassment are not dealt with appropriately. The consequences of inequality should be unsurprising given what an employer would expect from any unhappy employee – lower productivity and potentially increased levels of absence, which are highly likely to be linked to a decline in mental health. This can ultimately result in high staff turnover. Meanwhile the poor culture gets perpetuated by those remaining in the organisation. If an employee knows their rights they can take their employer to the Employment Tribunal for failing to comply with their legal obligations.
Firms are at risk of losing out on talent and suffering reputational damage, placing them at a competitive disadvantage. All individuals must have equal opportunity in the workplace and employers are expected to deliver. Changing culture needs to start at the top and there needs to be a recognition of what behaviour is unacceptable and clear communication to and understanding by all staff. A zero-tolerance approach needs to be taken. With numerous events in this industry which are outside of working hours, it is important to make clear that these are still professional environments and staff are expected to conduct themselves accordingly. Excusing sexual harassment because of intoxication and therefore not taking any punitive action is not acceptable.
The starting point to improving equality and diversity and thereby changing culture is a firm’s approach – whether it seen as something to be embraced or merely an obligation. It’s rather akin to how a firm approaches the principles around treating customers fairly – those who put the customer at the heart of what they do will get it right and ultimately be successful. But those who look to see what they can get away with makes any commitment to these values meaningless.
Head of Policy