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BLOG: Diversity and Inclusion in the Financial Sector

The FCA’s proposals to introduce a regulatory framework to support further diversity and inclusion in the financial sector have been consulted on. Find out what this means for the insurance sector with insight from Angela Hayes, Partner at DAC Beachcroft.

The implementation of DE&I initiatives throughout the insurance industry has moved on from just being a tick box exercise. More and more firms are understanding the importance of embracing a diverse and inclusive workforce, not just to address the talent crisis that is being experienced industry-wide.  They’ve recognised that a DE&I strategy is an enabler for a more creative work environment, increased employee engagement and a deeper understanding of customer relationships.

Despite this seemingly positive engagement, there is a slew of data that shows there is still much to be done. A 2023 KPMG report, in collaboration with the Association of British Insurers, revealed that “ethnic representation has fallen since 2017, despite higher-than-ever levels of awareness and inclusivity-focused initiatives. The increased focus on LGBTQ+ also seems to have had a limited impact”.

In September last year, the FCA released a number of measures looking to address underrepresentation in firms. At a recent DAC Beachcroft Insurance Advisory Event, Partner Angela Hayes provided insight on the FCA’s proposals on diversity and inclusion and what these mean for insurance businesses. She commented; “The FCA have been signalling the importance of diversity and inclusion at a supervisory and board level for many years. It has now released papers that apply to many more firms.”  These papers propose that companies with 251 or more employees, as well as dual-regulated CRR and Solvency II firms of any size, will be expected to adopt certain diversity and inclusion measures. The FCA has recognised that the implementation of DE&I needs to be proportionate across the financial services sector, hence the introduction of these thresholds. However, companies must be aware that there will be standards applicable to all firms, such as “adopting a zero tolerance approach to discriminatory conduct”.

The FCA states that the aim of all this is to “help firms understand customers’ diverse needs and make the market an attractive career proposition for future talent”. This goes hand in hand with their new Consumer Duty, which has a suite of rules related to the quality of a company’s products and whether they meet the needs of consumers.

In a speech delivered at a PwC Glasgow event at the end of September, Nikhil Rathi, the CEO of the FCA, talked about the regulator’s plans emphasising; “For the FCA’s part, this includes making the case that a genuinely diverse and inclusive workforce will better understand the needs of a diverse customer base.”

In their portfolio letter of that same month, the body said “Areas for improvement include diversity, equity and inclusion (DEI) at all levels. They also include preventing and handling non-financial misconduct including discrimination, harassment, victimisation, and bullying.” Certainly, these types of behaviour are evident in every type of firm, regardless of their size, and even the smallest MGAs and insurance businesses should have initiatives, sponsored by senior management, to counteract this.

Hayes explained some of the proposals put forward by the regulator in more detail. She said; “The first area is the implementation of a firm wide DE&I strategy, available to anyone and based on current levels of diversity and inclusion. It’s an obligation to now collect this type of data.” She discussed how this strategy must include, as a minimum, objectives and goals and a plan for meeting those and measuring progress of them.  She also highlighted that the management body (i.e. the most senior levels of the firm) is responsible for the strategy, cementing the importance being placed on these initiatives.

She went on to say “the second area is quite controversial because of the danger of positive discrimination.” This is because the FCA is proposing, under their guidance, that firms set targets in an effort to address underrepresentation at both board and firm-wide levels. Hayes reported that “the FCA says firms must exercise judgement on which characteristics you will focus on”.

Hayes also touched on the fact that “a regulatory report will be annually required from firms including mandatory fields of data such as age, ethnicity, long-term health conditions, gender, sexual orientation and then voluntary fields of gender identification, socio-economic backgrounds, parental responsibilities and care responsibilities.”

According to Hayes the regulator “asks that diversity risk will be considered on the same level as financial risks”. For example, money laundering and sexual harassment would be classified as equally serious. Furthermore, in the case of non-financial misconduct this type of behaviour will now be considered a breach of conduct rules, or for those who are approved under the Senior Managers and Certification Regime (SMCR), a ‘fit and proper’ issue (even if the said offence was committed outside of the workplace).

The consultation on the FCA’s diversity paper closed at the end of December and Hayes expects new rules to come into force in 2025. Clearly, the regulator is taking significant steps to put in place a suitable structure to drive change. Although the FCA’s proposals relate to larger firms, this doesn’t mean smaller firms should be excused from making DE&I a priority. In any case, the benefits will apply to companies of any size, including those in the MGA sector. These minimum standards will enable consistency within the industry and will hopefully create innovative, non-toxic workplaces which can deliver better outcomes to customers.