BEING HUMAN

How should your business practices reflect the new regulatory approach to Inclusion and Diversity?

Have inclusion and diversity become standalone regulatory issues in 2021 and, if so, what do firms need to do in response?

Compliance with financial services regulations has traditionally been associated with long, turgid rulesets, checklists and inflexible deadlines, rather than emotional intelligence, insight and empathy.

However, since the emergence of corporate governance as a regulatory focus area (we’ve been writing about this since 2015) the face of financial regulation has been morphing into a more human one. This trend was accelerated from 2018 onwards, when the FCA reacted with enthusiasm to the political impetus generated by the #MeToo campaign. This included pronouncing that sexual harassment, alongside other forms of discriminatory and bullying behaviours, constituted misconduct of the type that regulators ought to be interested in. In the years since, we’ve seen the regulators become highly focussed on values and behaviour within financial institutions within the context of their ‘culture and conduct’ agendas, with a particular focus upon the importance of creating psychologically safe cultures as a risk management imperative.

Those firms that fail to reflect society run the risk of poorly serving diverse communities.

The appointment in October 2021 of Nikhil Rathi as the FCA’s CEO has given fresh and welcome impetus to the trend towards humanising financial regulation. Mr Rathi showed an early commitment to improving the financial sector’s diversity and inclusion record, including a powerful speech in March 2021, in which he described the rationale for his approach succinctly and compellingly. The regulator cares, he said, because ‘diversity reduces conduct risk’ and because ’those firms that fail to reflect society run the risk of poorly serving diverse communities'. Inclusion and diversity are regulatory issues. A Discussion Paper – a rare collaboration between the FCA, the PRA and the Bank of England – on the subject of diversity and inclusion followed this speech. The three authorities spoke clearly and with one voice to tell the markets that effective inclusion and diversity policies and procedures are very important for effective risk management:

We believe that more diverse and truly inclusive firms will benefit from better risk management, as individuals will feel more empowered to have open discussions and debates, without fear of having their views shut down.

We view it as a certainty that there will be significant additions to the FCA and PRA rulebooks in 2022, following this Discussion Paper.

This regulatory direction of travel makes sense. A financial institution is, like any corporate, made up of a collection of individual human beings. To suggest that senior management function holders ought to be superhuman in the pursuit of effective risk management is not realistic. I hope that one of the positive impacts of the global pandemic will be the abandonment of the ideal of the infallible super-professional, and the acceptance that there are essential vulnerabilities inherent in the human condition, which financial institutions and their regulators need to recognise and accept in order to manage risk realistically.

So, how do you reflect this new regulatory approach in your business practices? At BCLP, we have already adapted the conduct of our internal investigations on regulatory topics to reflect this change in approach. I am helping my clients to make sure that their recruitment processes are aligned with the regulators’ diversity and inclusion agenda and update their whistleblower policies and procedures to reflect the regulatory emphasis upon non-financial misconduct as a regulatory breach.

Firms should be focussed upon:

  • Aligning their performance management processes afresh with the values and behaviours they are seeking to drive
  • Re-considering their remuneration structures
  • Revisiting their boardroom protocols and practices
  • Teaching their staff at all levels about psychological safety, why it is important and what it looks like in practice within a financial institution
  • Coaching their leaders at all levels within the organisation to ensure that the ‘tone from the middle’ does not undermine progress towards strategic objectives that have been set at the top

CONCLUSION

I’m not going to be advocating for any more home-schooling (please!) but would encourage firms to regard the post-pandemic, sensitive-to-the-human-condition approach to financial regulation as a real improvement, and an opportunity to develop better risk management practices and to secure better business outcomes.

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MEET THE AUTHOR

POLLY JAMES

Partner and Global Practice Co-Leader - Financial Services Disputes and Investigations, London

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