Why regulators should care about monitoring diversity

Virginie O'Shea, founder of Firebrand Research, lays out the case of why diversity in the financial services community should come under the scope of regulators.

I had an interesting Twitter discussion a few weeks ago that made me think about the topic of diversity in the industry and what role the regulator should play in this area. The UK’s Financial Conduct Authority (FCA) was called out by the finserv press earlier this month for failing to properly monitor diversity stats in the industry and rightly so, I believe, but not everyone agrees.

Now, as is the way with topics that are or seem politically sensitive, you can end up in a huge irrational argument on social media if you aren’t careful. As an analyst, it is my job to listen to all perspectives and make rational and logical recommendations, which helps when evaluating even the most controversial of topics. That doesn’t mean I don’t have personal views – full declaration here that I am a diversity champion – but it does mean I can listen to and actually hear other opinions.

Turning back to the discussion, the comment I initially received was that diversity has “nothing to do with financial conduct”, so why should the FCA monitor or care about those statistics? At the face of it, the role of the regulator is to monitor and take action against financial services firms when they breach specific rules and regulations such as those related to anti-money laundering requirements (a popular topic of late) or market manipulation. But we should also look at the more complex mission statement of the FCA for more clarity.

The role of the FCA or any other regulator is also to protect the interests of the public. The FCA mission statement is comprised of three main aims:

  • Protecting consumers
  • Enhancing market integrity
  • Promoting competition

A significant part of the regulator’s time is to keep a close eye on what the industry is up to and to take action (including formulating new regulation) when things happen that need to be addressed. Monitoring all aspects of the industry’s make-up and effectiveness is part and parcel of that role.

Just look at the rather onerous obligations firms must meet as part of the Senior Managers and Certification Regime (SMCR), which is gradually extending its implementation reach beyond the top layers of management and down to those directly interacting with end consumers and investors. SMCR entails regular reporting and certification of employees at financial services firms to ensure they are the right fit for the job.

There are countless studies out there about the benefits of a diverse workforce versus group think when it comes to making effective risk management or even business decisions. If the FCA is concerned about protecting market integrity and consumers, monitoring governance and effective management of financial services firms is an integral part of those aims. Keeping an eye on where employees are being recruited from, their qualifications and their background is part of SMCR, shouldn’t diversity be part of that endeavour?

This isn’t about token gestures or meeting quotas; it’s about making sure the industry is able to cope with change. We stress test our systems and operational resilience is top of mind for many, but shouldn’t we apply the same logic to our employees? We talk about the need to avoid correlation risk in the market, but isn’t a lack of diversity also a correlation risk? If we put people under stress (as many are at this time), isn’t it better to have a range of experiences and backgrounds to draw from to solve a particular problem?

Hopefully, I’ve made you think about the subject a bit more as the Twitter conversation made me think about the role of the regulator in diversity. I absolutely believe that the regulator should be measuring diversity statistics in the same manner that it assesses any risks or weaknesses in the financial services community. This isn’t a question of politics, it’s a question of protecting the markets.