The regulator is cracking down on poor diversity and inclusion practice in the profession, so what more should firms be doing? Simoney Kyriakou reports
In September, the UK Financial Conduct Authority (FCA) closed the three-month consultation on its discussion paper ‘DP21/2: Diversity and inclusion in the financial sector – working together to drive change’.
According to the 57-page document, there is still a long way for the profession to go to improve diversity, equality and inclusion (DEI). The FCA wants to know how it can mandate DEI among regulated firms and make senior managers accountable for a lack of diversity.
The paper states: “Large gender and ethnicity pay gaps still exist in the financial sector. There are parts of the industry that lack diversity at senior levels and the products offered to customers still do not always meet the needs of disadvantaged groups.”
DEI is not a nice-to-have; it is a business imperative.
Consultant Johnny Timpson, who is also the founder and chairperson of the Access to Insurance Working Group, points out that, in 2020, consultancy McKinsey showed that the most diverse companies are 25% more likely to be profitable than the least diverse.
So, what more can and should you be doing to meet the FCA’s proposals and to future-proof your business models?
Core discussion points
In their paper, the FCA, the Prudential Regulation Authority and the Bank of England have set out policy optionsincluding, among others: the use of targets for representation; measures to make senior leaders directly accountable for diversity and inclusion in their firms; linking remuneration to diversity and inclusion metrics; and the regulators’ approach to considering diversity and inclusion in non-financial misconduct.
The discussion paper also focuses on the importance of data and disclosure to enable firms, regulators and other stakeholders to monitor progress.
On many of these points, professionals welcomed the FCA’s thoughts. For example, on language and terminology, the CII’s consultation response read: “Ensuring language is simple, concise, and conveyed in a professional and inclusive manner is essential. Our aim must be to reach a point where we no longer identify DEI separately, but use it organically within our profession.”
But the CII also highlighted that any regulatory-led approach to improving DEI must come from the top. It held a mirror up to the FCA regarding its own use of opaque language.
The CII stated: “Some examples of where this [simple] language needs to be used are in: discussion papers; legal documentation; published pieces; and communications to prospective candidates (including school, college, university and apprenticeship leavers).”
In addition to the questions around language, jargon and senior managers’ accountability, the paper has also raised important points for the way in which insurers provide products and services to clients and potential clients.
Our aim must be to reach a point where we no longer identify DEI separately, but use it organically within our profession
According to Mr Timpson, there may be areas where protected characteristics as outlined in the Equalities Act and underwriting measures collide.
For example, life insurance policy premiums may increase with age, or cover may be refused to someone or offered on different terms because of pregnancy or disability.
As the FCA has stated that product governance will fall under its remit as far as DEI is concerned, this should force insurers and brokers to prove that there was no deliberate discrimination.
Mr Timpson explains: “They must be able to show there is a difference in risk associated with one of these protected characteristics.
“Discrimination can manifest in different ways. Direct discrimination is more overt mistreatment, due to a protected characteristic; indirect discrimination occurs when someone is disadvantaged by a rule or requirement, which initially appears to be non-discriminatory but inadvertently is.”
The FCA is also interested in the way companies collect and collate data on their workforce or clients to assess the levels of diversity and address any pay or personnel gaps. But this could have a ‘long tail’, in that it might also touch on how insurers collect big data to analyse and assess risk selection and pricing.
Mr Timpson asks: “Is there ever a time when it is both legal and appropriate to use personal characteristics to inform an insurance product’s availability and price?”
He says in short, the answer is ‘yes’, as legally some exceptions may apply to policy pricing and underwriting. For example, a disability could be an influencing factor where the insurance risk may be greater as a direct result and this will lead to a policy decision.
But companies cannot rely on this to put blanket policies in place that ‘uniformly decide’ terms for people with disabilities. Moreover, the regulator will want to see there is a quantifiable, discernible difference in risk. This will require companies to keep accurate audit trails as well as to review products and policies regularly to avoid indirect discrimination.
Again, this is where transparency comes into play. The City watchdog will take action if a client complains that a company’s lack of DEI has resulted in direct or indirect discrimination.
So, how can UK firms shape up in response to the discussion paper in a meaningful way?
Mr Timpson says: “Make inclusion by design central to the firm’s proposition development, policy, practice, behaviours and culture.”
He provides seven pointers, which will help firms meet the FCA’s recommendations:
- Appoint someone to be a DEI champion.
- Ensure there is a mandatory training framework in place.
- Set up a group to shape policy, practice, values and behaviours.
- Work with a corporate charity partner.
- Understand protected characteristics and the legal framework.
- Develop a DEI policy and review it regularly.
- Undertake a diversity audit.
Siobhan Barrow, head of individual distribution at Scottish Widows, agrees that practical measures such as training, entry placements and mentorships have been shown to encourage more diverse people into industries.
However, she says “fewer than one in 10 companies provide internships and training placements for diverse candidates, despite one in five believing this would be effective.”
Therefore, Ms Barrow encourages companies to “represent society”. “If we don’t,” she adds, “there is a risk our industry becomes not just unrepresentative, but also irrelevant.”
There are parts of the industry that lack diversity at senior levels, and the products offered to customers still do not always meet the needs of disadvantaged group
But some commentators feel the paper does not go far enough.
The CII raised the point that the regulator needs “to be clear and concise for firms where the head offices are overseas”, adding: “This underlines the importance of the UK regulators continuing to engage in international dialogue.”
Roger Edwards, independent insurance marketing consultant, comments: “Having worked in ‘big corporate’, there’s always a danger something like this creates a (well-meaning) box-ticking exercise.
“I have seen it in the past with other forms of legislation, such as treating customers fairly.”
Therefore, if the options open to companies around DEI are a box-ticking exercise at one end of the scale, and a genuine top-to-bottom cultural desire to change and lead the way at the other, then “I would like to see the FCA push companies towards the latter”, Mr Edwards adds.
Ms Barrow agrees it has to be top-down and bottom-up; a collective effort or nothing will improve for either insurers, brokers or clients.
She concludes: “Organisations that succeed [will be those that create] truly inclusive organisational values and nurture difference. This includes the invisible differences too such as different ways of working and inclusive leadership styles.”
Simoney Kyriakou is senior editor of FTAdviser