Capital Markets Corporate

April 29, 2021

Who is responsible for diversity?


The Financial Conduct Authority (FCA) revealed this week it is planning to interrogate firms on diversity and inclusion by adding a sixth question to its conduct questions list. The list currently comprises of five questions covering a range of behaviour and compliance risks and is part of the Senior Managers and Certification Regime (SMR).

Launched in 2016, the SMR started as an initiative to raise senior management standards in banks and was subsequently extended to all firms regulated by the FCA in December 2019. The FCA designed the SMR to help promote change in the way “firms allocate responsibilities, align those responsibilities to relevant controls and ensure oversight as to how these controls operate down the line”.

The news is significant as it would be extending the scope of the SMR – designed to promote personal engagement and accountability within financial services organisations – to cover issues of diversity for the first time. Speaking at an NYU Law School virtual event this week, Mark Steward, executive director of enforcement and market oversight at the FCA, identified diversity and inclusion as “another telling indicator of culture”.

Culture change within banks has been high on the regulatory agenda since the perceived risk culture within banks led to the last global financial crisis. In November 2018, the G30 noted in its Banking Conduct & Culture, A Permanent Mindset Change report that “banks have shown a clear, rapid, and positive shift in their view of the importance of conduct and culture. But much of the work has been done at the most senior levels of the organisation—with ‘tone from the top’ receiving much more focus than ‘tone from above’.”

Actions speak louder than words

For permanent and ongoing change to occur, banks now need to focus on embedding culture awareness and stewardship at all levels of their organisations, with a particular focus on middle management and frontline businesses.

The regulator’s focus on individual responsibility is aligned with the G30’s vision that culture change is only effective when everyone in an organisation feels responsible – and ultimately liable – for it. Warm words from the leadership team on diversity, which represented progress only a few years ago, is no longer considered enough and statistics have shown that they were no guarantee that change will actually occur in an organisation.

Individual accountability is the tool that the FCA has chosen to drive change, upholding its belief that the law really can change the mores of an organisation. This will have profound implications for regulated firms, as senior managers grapple with their statutory duty of responsibility and the meaning of the phrase ‘steps taken to avoid or prevent non-compliance’ when it comes to diversity issues. The industry needs to get ready to support their managers in meeting these important additional responsibilities.

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