UK financial bosses could have pay linked to diversity
- UK financial bosses could see pay linked to workforce diversity
- Financial Conduct Authority (FCA) and the Bank of England (BoE) set out new diversity goals
- British watchdogs considering making senior staff accountable for diversity and gender inclusion
- Women and ethnic minorities underrepresented in the financial services sector
UK watchdogs released a joint statement this week, noting that senior City executives could see their pay linked to progress in workforce diversity and gender inclusion.
It represents the regulators latest attempt to improve diversity in the financial services sector, which men have historically dominated.
Executives at the Financial Conduct Authority (FCA) and the Bank of England (BoE) unveiled plans to speed up diversity reforms in the City of London – a move that they believe could make British banks and investment companies more robust and safe.
The UK watchdogs said they wanted to improve workforce diversity in Britain’s top financial services firms across all physical and social qualities, including gender, ethnicity, sexual orientation, education, mental and physical impairments.
To crackdown on inequality, regulators said that senior staff could see pay or bonuses linked to the number of women, disabled people or ethnic minority workers employed at the company.
Research from the FCA and the Prudential Regulation Authority (PRA) showed that in 2020 just 6.8% of FTSE 350 board members came from non-white backgrounds, while only 5% of CEOs working in companies listed on this index were women.
The discussion paper also highlights that more than 30% of senior management roles in companies that had signed up to the UK government’s Women In Finance charter had increased by just 1% between 2017 and 2020.
Meanwhile, the Green Park Business Leaders Index, which records the number of black leaders and minority ethnic groups in the top three roles of FTSE 100 listed companies, revealed that for the first time in six years, there were no black chairs, CEOs or CFOs in 2021.
Ethnic minority groups and women underrepresented in leadership positions
Early findings in the Green Park Business Leaders Index 2021 also revealed that just 3.4% or 10 out of 297 leaders in the top 3 positions at FTSE 100 listed companies came from non-white backgrounds.
Figures revealed that ethnic minority representation dropped from 10.7% to 9% over the past year, and the prospect for future increases remains slim.
A study conducted by the FCA and the BoE’s PRA also found that people from higher socio-economic backgrounds occupied 89% of senior roles. At the same time, the number of women in the top three financial services positions rose from 1.7% in 2001 to 9.7% by 2020-end.
Although the number of women in senior leadership roles has improved dramatically over the past five years, they are still significantly underrepresented in board positions.
The difference between average hourly earnings for men and women in the UK is 15.5%, with the gap widening to 20% in the banking and financial services sectors.
The difference in pay between women and men at the executive and board level is even more significant, with 90% of men earning in excess of GBP 1M per year compared to women.
There is an argument that this is due to men being more proficient in their work. However, recent statistics show that females in senior management positions are more successful than men regarding leadership capabilities.
The FCA and the PRA have acknowledged the importance and benefits of workforce equality, with their joint statement reading: “We believe that targets for representation can be a powerful way of driving change by committing to a shared goal.”
Sam Woods, chief executive of the PRA added: “A lack of diversity of thought can lead to a lack of challenge to accepted views and ways of working, which risks compromising firms’ safety and soundness.”
Chief Executive of the FCA, Nikhil Rathi, agreed, stating that “by improving diversity and inclusivity in the workplace, firms can strengthen decision making in the company.”
Although some companies have made efforts to reduce inequality in the workplace and promote diversity, Mr Woods, notes that “it is in its early stages and more needs to be done to speed up the progress.”
The proposal could see firms in the City of London forced to set new targets to employ women and minorities as well as smaller companies and junior roles.
However, the plans also expose the Bank of England and the FCA to accusations of hypocrisy due to failing to hit their own benchmarks.
BoE and FCA could be accused of hypocrisy
According to the latest data, only 40% of senior leadership roles in the FCA are occupied by women – lower than the 45% target. The UK watchdog also revealed that it failed to make any progress on the issue during 2020.
The BoE also failed to give 35% of management positions to women by 2020-end and declined to comment on its missed targets.
Many British firms have cited disruption caused by COVID-19 cited as a reason for missing diversity goals, with restructuring and hiring issues proving to be the following most popular reasons.
The FCA was one of few financial firms that had set ambitious targets; however, the regulator didn’t use that as an excuse for their failure.
One FCA spokesman said: “We know that more work is needed to meet targets, but we are progressing towards that goal. Nine out of our 18 board ExCo members are female, and we will continue to improve upon this.”
The joint statement issued by the two regulators noted that they did not want to set prescriptive rules linking pay or bonuses to diversity goals but are considering tying progress on the matter to pay.
The FCA and the PRA are also considering introducing mandatory rules that would hold senior staff directly accountable for diversity and inclusion in their business.
Although some companies have already taken steps to boost diversity and inclusion by linking CEO wages and bonuses to the implementation of inclusive workforces, the watchdogs believe the financial services sector needs to be regulated more due to the slow reform pace.
City executives found guilty of ignoring rules on diversity and inclusion could be deemed unfit to hold a senior position and demoted.
Hundreds of banks, investment firms and other financial institutions have already signed up to inclusivity programmes, such as the Women in Finance Charter, backed by the Treasury.
Some of Britain’s largest banks, including Lloyds, Natwest and Barclays, have set up ambitious diversity targets to create an inclusive environment for colleagues, customers and communities in the UK.
The Bank of England and the FCA believe that a more diverse financial industry could boost decision-making, promote new ideas and improve products and services for consumers.
Chief executive of the FCA, 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.”
Firms also face diversity reporting requirements as regulators want to collect data from companies to assess performance on diversity goals.
Firms to face diversity reporting requirements
The discussion paper included plans to force firms to publish data on the diversity of senior staff and the broader workforce to allow regulators to measure progress.
According to the FCA and the PRA, the move should act as an incentive for companies that rank poorly for diversity to introduce measures that create a more inclusive workforce.
However, regulators will need to consider how much of the data should be publicly disclosed and whether they should introduce penalties for adverse findings.
According to the FCA and PRA, companies could measure progress by collecting data across all social and cultural constructs – nationality, education, age, disability, sexual orientation and ethnicity, as well as whether employees are full-time, part-time or working flexible hours.
“We could consult on requirements for firms to publicly disclose a selection of aggregated diversity data on the firm’s senior management population and the employee population as a whole. We could also discuss their diversity and inclusion policies so that other firms and stakeholders can benchmark progress,” the paper said.
Chief executive of the Financial Services Skills Commission, Claire Tunley, who advocates the new proposal, said, “while progress has been made, firms need to take further action to mobilise the breadth of change required by UK regulators.”
A one-off pilot survey will be conducted in late 2021 to assess data collecting methods. The discussion paper is also open to public consultation until September end, with another discussion on the proposal expected to occur in early 2022.