23 March 2018 - Post by:Sarah Henchoz
We are often asked by clients to what extent the FCA would consider employees who have been found to have acted in a discriminatory and/or bullying manner to no longer be considered fit and proper; whether these issues form reportable concerns to the FCA, do they amount to conduct rule breaches and, of course, do they need to be mentioned in a reference.
Following the FCA’s recently published Discussion Paper on transforming culture in financial services, Megan Butler, the FCA Executive Director of Supervision – Investment, Wholesale and Specialist, gave the keynote speech at the recent Women in Finance Summit giving her view on how the industry’s approach to gender has changed in the last year. She gave an example where, last year, she was told by a senior individual in the asset management industry that gender and diversity was not a matter for the regulator. Unsurprisingly, she no longer hears this argument, it being recognised by firms that their approach to diversity and how they deal with behaviour that is contrary to their cultural beliefs is very much something the regulator expects to know about.
Ms Butler attributes the change in the industry’s approach to a number of factors, namely, the success of the Women in the Finance Charter, publication of gender pay gap reports and, of course, the #MeToo movement. She notes that only 13% of FCA approved individuals in trading firms are women and that banks have reported pay gaps of around 50% for wages and 80% for bonuses. There is still evidently a lot to be done.
She makes it clear that the FCA’s focus is on creating healthy cultures within the financial service industry and that diversity is a prominent part of addressing risk management within organisations. She specifically linked this to the Senior Managers and Certification Regime and the onus on firms and individuals to ensure that they are fit and proper to perform their roles. What can we learn from this? I think it is a clear sign that where a Senior Manager or Certified Person has acted in a way that is contrary to diversity values, the regulator will expect a firm to take a tough line and, in appropriate cases, draw conclusions that their conduct does indeed impact their ability to be assessed as fit and proper. Proper and thorough investigations will need to be undertaken, appropriate sanctions imposed and remedial action taken not just in relation to impacted individuals but to any policies and processes that can be improved in order to mitigate against repeated inappropriate conduct or, at least, to help identify it and rectify it at an earlier stage. For the individual this, of course, has significant consequences but, as with all diversity-related matters, unless a firm’s response to poor behaviour is taken, change will not happen.
Further, the FCA is going to be taking a greater interest in what firms are doing more broadly on diversity, recognising that those organisations that have a diverse workforce will significantly lower their conduct risk. In support of this, Ms Butler refers to the fact that firms with “monocultures” suffer 24% more governance-related issues than their peers. Again, I think we can infer from this that the regulator is going to put pressure on firms to account for any lack of diversity (particularly where conduct issues occur) and to understand what is being done to address this.