By Kristy Dorsey

Senior managers across the financial sector could have their pay linked to progress on workforce diversity and inclusion (D&I) targets under proposals put forth by UK financial watchdogs.

In a discussion paper jointly published yesterday by the Financial Conduct Authority (FCA), the Bank of England (BoE) and the Prudential Regulation Authority (PRA), the authorities said they are starting a “new conversation” with firms on how best to cut down on “groupthink” that spurred on disasters such as the 2008 banking crisis.

Active promotion of D&I, they said, would improve “governance, decision-making and risk management” within firms, while also creating a more innovative industry with products and services better suited to the diverse needs of customers.

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Despite progress in recent years, the regulators said the pace of reform has been too slow. They also noted that with most of the focus on gender and ethnic diversity, there is less information available on other D&I metrics such as disability, social mobility and sexual orientation.

Similarly, they noted that information on diversity is more widely accessible, as it is easier to “count up” those of various characteristics than it is to measure their influence – and thus their “inclusion” – at more senior levels.

“Regulators and industry need to work together to increase diversity at senior levels and ensure that the UK’s financial services firms are best-equipped to serve the economy,” said Sam Woods, chief executive of the PRA.

“A lack of diversity of thought can lead to a lack of challenge to accepted views and ways of working, which risk compromising firms’ safety and soundness.”

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Hundreds of banks, investment firms and insurers are signed up to the voluntary Women in Finance charter, which is backed by the Treasury and commits firms to link pay to gender targets. However, the charter’s latest 2021 annual review found an average of 32 per cent female representation in senior management among its participants, an increase of less than 1 percentage point year-on-year from 2017.

The discussion paper further noted that the proportion of female chief executives in the sector increased from 1.7% in 2001 to just 9.7% by the end of 2020. Meanwhile, there are signs that ethnic diversity in financial services is declining, while the most senior roles continue to be dominated by people from higher socio-economic backgrounds.

To assess progress, the authorities are proposing to collect data from firms about their workforce covering areas such as gender, nationality, educational attainment, age, disability, sexual orientation, family status and whether employees work full-time, part-time or on a flexible basis. There will be a one-off pilot survey later this year to help develop proposals set out in the discussion paper and test how firms might provide such data on a regular basis in the future.

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“We are concerned that lack of diversity and inclusion within firms can weaken the quality of decision-making,” FCA chief executive Nikhil Rathi said. “We look forward to an open discussion on how we should use our powers to further diversity and inclusion within financial services, to the mutual benefit of firms and their customers.”

As part of the package of proposals, senior managers could have a specific responsibility for diversity and inclusion policies to ensure the right “tone from the top”.

“Linking progress on diversity and inclusion to remuneration could be a key tool for driving accountability in firms and incentivise progress,” the paper says.

The discussion paper is open to public consultation until September 30. The feedback and data received will be used to develop detailed proposals, with a joint consultation planned for the first quarter of next year.