What’s the link between diversity and inclusion and risk management?
15th November 2023
Article written by Meg Shona Halpin-Webster, Graduate eLearning Content Writer at Marshall E-Learning Consultancy, a Ciphr company
Diversity and inclusion (D&I) has a critical role in risk management the financial sector; D&I isn’t just ethically important, but it also helps firms to maintain their integrity and effectiveness. Conduct risk management is a core focus of the Financial Conduct Authority (FCA), as demonstrated in its 2023 diversity and inclusion consultation, and is one area of finance where firms that can be significantly impacted by diversity and inclusion. As a leading provider of diversity and inclusion eLearning, with a dedicated range of FCA compliance eLearning for finance firms, we wanted to explore the relationship between diversity and inclusion and risk management, and highlight the influence that diversity and inclusion can have on this industry.
How does diversity and inclusion impact risk management?
Diversity and inclusion does have a significant impact on conduct risk management risk across the financial sector. Conduct risk refers to the risk of financial losses, regulatory actions and reputational damage arising from behaviour that is either inappropriate or unethical, including misconduct activities such as fraud and mis-selling.
Back in 2021, the CEO of the FCA, Nikil Rathi commented on how diversity and inclusion directly impacts the management of conduct risk:
“As an employer, we are determined to improve our diversity and to work on our culture to ensure it is inclusive. As a regulator, we want the same from firms we oversee and in the markets we regulate. Not because it is a social good – although, frankly, that should be enough. We care because diversity reduces conduct risk and those firms that fail to reflect society run the risk of poorly serving diverse communities. And, at that point, diversity and inclusion become regulatory issues.”
Building on Rathi’s comments, here are seven ways that diversity and inclusion impacts risk management:
- It shapes the risk culture: an inclusive workplace encourages open dialogue, ethical decision-making and the reporting of misconduct, building a more robust risk culture
- It helps to mitigate biases: a diverse and inclusive workforce mitigates unconscious biases by challenging stereotypes and assumptions and promoting objective decision-making. Addressing discrimination and bias actively reduces the risk of biased conduct
- It helps to increase transparency: inclusion encourages open communication and transparency, simplifying the identification and prevention of conduct risk
- It strengthens risk assessment and reporting: a diverse environment adds a variety of perspectives to the process of risk assessment, making them more comprehensive and open to the identification of risks that may not be as apparent in cultures that are less diverse
- It boosts stakeholder trust and reputation: financial institutions find themselves in a stronger position on the market when they have strong diversity and inclusion practices in place, which can reduce the likelihood of conduct risk incidents that may damage the firm’s reputation
- It aids compliance: prioritising diversity and inclusion initiatives helps firms to meet expectations and comply with governance and risk management frameworks
- It makes it easier to attract and retain talent: being an inclusive firm leads to greater retention of employees and attraction of strong talent, including those from underrepresented groups
As you can see, diversity and inclusion is integral to effective risk management. Diversity and inclusion can influence the culture and reputation of an organisation, as well as risk assessments and compliance efforts.
Four ways that the FCA’s requirements promote greater diversity and inclusion
The FCA’s role in actively promoting diversity and inclusion across the financial sector is multifaceted. Here is a breakdown of just some of the ways that the FCA contributes to the promotion and implementation of diversity and inclusion.
1. Regulatory oversights to promote inclusive workplaces
As a regulatory authority, the FCA supervises and regulates the UK’s financial firms. Within the FCA regulatory mandate, there is a strong encouragement for financial institutions to create a workplace culture that is both diverse and inclusive. To promote diversity and inclusion, and help foster the ideal workplace environment, the FCA sets guidelines, expectations and requirements for firms. Firms that fail to meet the requirements set by the FCA can face enforcement measures, such as fines and public censure.
The FCA encourages firms to cultivate an accepting workplace environment, where all employees, regardless of their background, feel valued and can reach their full potential. To do this, the FCA advocates for the fair treatment and respect of all individuals, and opportunities for all. The FCA continuously monitors progress made by firms, assessing policy effectiveness and suggesting areas for improvement.
2. Reporting on diversity and inclusion
The FCA requires certain regulated firms to report back to them on their policies and procedures for diversity and inclusion. For example, the FCA expects these firms to disclose information on gender and ethnicity pay gap; the status of diversity across different organisational levels; and the actions being taken to improve the overall diversity of the firm. The aim is to promote transparency and accountability across firms, reduce the disparity between men and women, and encourage meaningful action to achieve gender equality.
3. Improving representation across senior leadership
The FCA strongly emphasises the need for diversity in senior leadership roles and encourages financial institutions to increase the representation of women and individuals from underrepresented groups in leadership positions. Their objective is to create more role models and ensure the presence of diverse perspectives in decision-making across the financial sector.
4. Market conduct
Part of the FCA’s regulatory responsibilities is to ensure that diverse and inclusive work environments contribute to market conduct that is responsible and ethical. Financial firms are expected to manage their conduct risk effectively, which includes addressing diversity and inclusion-related issues.
How Marshalls can support better diversity and inclusion in the finance sector
Marshalls is a leading provider of diversity and inclusion eLearning courses that are applicable and relevant to every industry, including the financial sector. Embracing diversity and inclusion can help to create a more ethical, accountable and transparent working environment, and our eLearning content can help your firm achieve this. As we’ve demonstrated, diversity and inclusion has a significant impact on conduct risk management, reinforcing the necessity of strong diversity and inclusion across your firm.
We have also curated an in-depth collection of FCA compliance eLearning for financial firms, including a conduct risk eLearning course. Our compliance eLearning were developed in partnership with Victoria Sena, founder of Cherrybank Consulting and a recognisable expert in regulation, compliance, governance and risk management. To find out more about our diversity and inclusion and compliance eLearning, and how Marshalls can help your firm become more compliant and diverse, please get in touch.