Senior City executives could be forced to have their pay linked to progress in making their workforces more diverse and inclusive, the UK’s financial watchdogs have said.
The Bank of England and the Financial Conduct Authority (FCA) said they wanted to speed up progress in making the City of London more diverse, in a step they said could help to boost the safety and soundness of UK banks and investment firms.
Setting out a package of reforms in a discussion paper, the regulators said they were considering mandatory rules to make senior leaders directly accountable for diversity and inclusion in their firms, as well as linking progress to their pay.
Despite progress in recent years, the Bank and the FCA said the pace of reform was still too slow and that it believed a more diverse financial sector could improve the decision-making of companies, help spur innovation and make products and services better suited to customers’ needs.
The regulators said they wanted to improve diversity of thought in top finance companies, including through gender, ethnicity, disability, sexual orientation and education.
Sam Woods, the chief executive of the Bank’s Prudential Regulation Authority, which is responsible for supervising the UK’s biggest lenders, said: “While some progress has been made to improve diversity and inclusion in parts of the financial services sector over the last decade, the discussion is still in its early stages, and more needs to be done to speed up progress.
“A lack of diversity of thought can lead to a lack of challenge to accepted views and ways of working, which risks compromising firms’ safety and soundness.”
Most of Britain’s biggest financial companies already have diversity and inclusion targets and have taken steps to link the pay of senior managers to implementing inclusive workforces.
Hundreds of banks, investment firms and insurers are signed up to the voluntary Women in Finance charter, which is backed by the Treasury, and commits firms to link pay to gender targets. Banks including NatWest and Lloyds are among the biggest firms to have set such targets.
However, the reforms proposed by Threadneedle Street and the FCA would make these connections between pay and diversity mandatory for the most senior City executives.
According to the 2021 Women in Finance charter annual review, there was, on average, 32% female representation in senior management among charter participants last year, showing an increase of less than 1 percentage point year on year from 2017.
Nikhil Rathi, the chief executive of the FCA, said: “‘We are concerned that lack of diversity and inclusion within firms can weaken the quality of decision-making. We look forward to an open discussion on how we should use our powers to further diversity and inclusion within financial services, to the mutual benefit of firms and their customers.”