The need for these businesses to become more diverse and inclusive is one of the topics explored by the Financial Conduct Authority (FCA) in a new discussion paper on transforming financial services 'culture'. The paper, which consists of series of essays by academics and industry experts, considers what good culture might look like and the roles to be played by individuals, firms and regulators in bringing about change.
The FCA cites the introduction of the Senior Managers and Certification Regime (SMCR) as an example of its work to promote good culture and governance at financial services firms, by creating a formal link between the behaviour of individuals and the conduct of the firm. However, the paper makes it clear that mere compliance by firms with regulatory rules is not enough, as it creates the risk that firms will not focus sufficiently on ethical considerations.
"We as a regulator have long gone beyond having the mindset that simply complying with rules is enough," said Jonathan Davidson, the FCA's executive director of supervision for retail and authorisations. "However, we don't believe a one size fits all culture is the right way to go. So we want to promote a discussion and consensus on the essential features of a healthy culture and how firms, regulators, employees and customers can help deliver that culture."
The need for cultural change at financial firms has been a consistent theme of FCA consultations, thematic reviews and discussion papers since the regulator's inception in 2014. It has also been part of the driving force behind recent regulatory initiatives, including the introduction of the SMCR. However, the FCA is keen to emphasise in the paper that cultural change must be embedded throughout the firm, as "focusing solely on the 'tone from the top' can overlook the complexity of a topic like culture".
The SMCR was introduced for deposit-taking banks and building societies on 7 March 2016. It will be extended to insurers on 10 December 2018, and to other regulated firms at a to-be-announced date next year. The senior managers' regime requires firms to assign responsibility for certain areas of the business to named senior individuals, while the certification regime requires them to annually assess the fitness and propriety of staff in certain roles. The regime also incorporates additional conduct rules, applicable to all staff.
Financial services employment law expert Jon Fisher of Pinsent Masons, the law firm behind Out-Law.com, said that the FCA was clear in its paper that regulator-imposed "direct means" alone cannot deliver the necessary cultural shift.
"One of the other factors the paper addresses is the need for financial services businesses to be more diverse and inclusive in order to avoid the dangers of 'group-think' or, as the paper puts it, the dangers of having a team of 'excellent sheep'," he said. "The FCA has previously been on record as blaming the number of financial scandals in the sector on a lack of gender and ethnic diversity."
"Many firms are already taking action, but the pace needs to accelerate. The statutory gender pay gap reporting exercise has revealed that the pay gap in financial services significantly exceeds the national average. The Association of British Insurers (ABI) recently highlighted that only 21% of the top jobs in insurance are held by women. In the light of the increased regulatory scrutiny of this area, all firms should ensure that they have in place suitable diversity and inclusion strategies and that they are being implemented effectively: as the ABI says, 'good intentions are not enough'," he said.
"Creating a culture where true diversity can flourish requires leaders to put effort into understanding difference," said Jacey Graham, a diversity and inclusion expert at Brook Graham, which is owned by Pinsent Masons. "If you don't do that as a starting point, then you are likely to be unaware of the often small changes in behaviour needed to build an inclusive environment. One style of leadership doesn't necessarily fit all."
The FCA has not requested formal feedback on the discussion paper. Instead, it has requested that the financial services industry "consider the issues in the paper and to engage in the debate about what constitutes a healthy culture and how to promote it". The regulator itself intends to "continue our engagement with the external financial services community to gather practical examples of how the insights from this paper can be applied in practice".