Consultation Paper on Diversity and Inclusion
The UK Financial Conduct Authority (FCA) issued a consultation document to solicit opinions on the implementation of Diversity and Inclusion (D&I) policies in the financial industry and formulated a D&I implementation framework.
FCA believes that diversity and inclusion can build a healthy work culture, enhance employees’ understanding of different customers, and improve international competitiveness. However, banks and asset management companies still have shortcomings in implementing D&I, and it is necessary for regulators to take actions.
Development of Diversity and Inclusion
Diversity and inclusion are essential elements of the DEI. DEI (Diversity, Equity and Inclusion), as ESG at the social level, have been recognized by multiple jurisdictions. The Australian Securities Exchange advises companies listed on the ASX300 index to develop plans to diversify their boards. The European Union also requires large listed companies to achieve the target of 40% non-executive directors by 2026.
In addition to actions by regulators, some organizations have begun to incorporate DEI into voluntary codes of conduct. For example, CFA Institute has issued an initiative to accept financial institutions as signatories of the DEI Code and to disclose DEI implementation status within two years. The cumulative assets under management of the signatories currently exceed US$11.2 trillion.
Related Post: Origin and Development of Diversity Equity and Inclusion
FCA’s Research on Diversity and Inclusion
The FCA plans to monitor the development of D&I in the financial industry from four perspectives, namely:
- Healthy Work Culture: Reduce reports of inappropriate actions and implement higher standards of work conduct.
- Reduce groupthink: improve decision-making and risk management processes, and increase employee participation.
- Broaden talent standards: Attract diverse talent and reflect it across the board, management and employee.
- Meet consumer needs: design innovative products and improve consumer experience.
Through literature research, FCA found that there is a generally positive relationship between the development of D&I and company performance. However, current studies still focus on gender, and the scope is concentrated on the board of directors and senior management. The FCA plans to expand the scope of D&I and focus more on employee-level.
FCA’s Framework on Diversity and Inclusion
Taking into account the differences between different companies, the FCA has developed a D&I framework mainly for large companies and encourages other companies to apply it. The division of company categories is mainly related to the size of employees. The FCA considers companies with more than 250 employees or companies that meet CRR regulatory policies and Solvency II as large companies.
The D&I framework of large companies mainly consists of five parts, namely:
- Diversity and inclusion strategy: FCA recommends that companies incorporate D&I into development strategies, set specific goals, and let employees fully understand the role of implementing these strategies.
- Target setting: FCA recommends that companies set separate targets for boards, senior management and employees to address under-representation. At the same time, companies need to regularly review and update goals and monitor progress.
- Data reporting: FCA recommends that companies report employee-related data to the regulator every year and explain any discrepancies between these data and current targets and how these discrepancies will be resolved. Companies can also compile summary reports on a regular basis and compare these data with other companies in the industry in order to make progress together.
- Disclosure: FCA recommends that companies publicly disclose D&I data to improve transparency and comparability. Data disclosure can be in the form of percentages and set the disclosure time (annual reporting period or self-determined period).
- Risk management: FCA recommends that companies consider D&I risks as material non-financial risks and incorporate them into their corporate governance structures to address them. For the human resources department and risk management department, D&I risks should be dealt with as a priority and reported to the board of directors and senior management.
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