This article was first published by Thomson Reuters Regulatory Intelligence on December 20, 2021 (subscription only).
Increasing socio-economic diversity in financial services in not just a moral imperative for firms to consider: the PRA, the FCA, and the Bank of England all agree it is a means to improve business decision-making and reduce risk.
The problem is significant. The City of London Corporation’s government-backed taskforce on socio-economic diversity found that across the eight financial services firms it surveyed, 89% of senior figures came from higher socio-economic groups. This compares to a third of the UK working population overall. The same study indicated that employees from lower socio-economic backgrounds progress 25% slower than peers and report expending energy adapting to prevailing organisational cultures.
But why does removing the barriers that prevent some people from entering financial services and progressing to senior roles really matter? Haven’t business leaders already got enough to think about with other dimensions of diversity, including gender, ethnicity, sexuality, and disability – some of which already attract regulatory attention?
Achieving representation across multiple dimensions of diversity is important not just for reasons of fairness, but because it is linked to better outcomes for in decision-making, risk management, conduct, performance, and innovation. In a world changing as fast as ours, maximising the benefits of diverse perspectives is essential for financial services firms to thrive: Research has already shown that companies with more women on their boards outperform their competitors.
Most people will know about the dangers of ‘groupthink’, where decisions makers come up with the same answers because they all have the same experiences and so fail to spot risks or problems that would be obvious to someone outside this group. A team of people from similar socio-economic backgrounds will be at risk of suffering from groupthink and making decisions based on a single framing of the world. Even when a firm achieves a 50:50 gender balance, for instance, it is still likely to lack the benefits of some of the cognitive diversity that could be derived from a greater range of experiences if all those people come from privileged backgrounds and went to similar schools.
Ignoring the socio-economic dimension can also make it harder to address the barriers imposed by other dimensions of diversity. For example, there’s increasing recognition that underprivileged young people from groups such as Gypsy, Roma, Traveller, and Black Caribbean face some of the greatest barriers to achievement and engagement at school. This inevitably leads to poorer representation and progression within the workplace. Without looking at socio-economic backgrounds when considering diversity, organisations miss the ability to identify and address such intersections of disadvantage.
How to address the issue
Socio-economic background is complex, often invisible, and cuts across other aspects of dimensions of diversity. To bring individuals from a wider range of backgrounds into financial services, and enable them to progress equitably within the industry, there are steps that are known to help.
Other business sectors have collated datasets that make it possible to assess progression rates across multiple demographic variables. This allows them to determine the relative effect of each variable and make the case for change. Financial services companies need to do the same, and depending on the outcomes of FCA Discussion Paper 21/2, monitoring may well be encouraged by UK regulators in the near future.
Before any data collection about socio-economic background begins, businesses should first explain to employees why this information is being gathered, how it will be used, and how it will be kept confidential. Many people will have built careers, networks, and friendships while hiding their lower socio-economic background, and will need to feel suitably protected. Only once these efforts have been made should businesses invite members of their workforce to self-declare characteristics, such as whether they attended a non-selective state school, accessed free school meals, and whether they and their parents attended university.
A business case for action
Like it or not, when companies consider something to be a ‘moral imperative’, in difficult times – such as a pandemic or other economic crisis – it can be sidelined if viewed as non-essential and a driver of cost. Therefore, it is critical for diversity – including socio-economic diversity – to be seen as a driver of business performance and growth.
Work currently being led by the City of London taskforce on socio-economic diversity will provide evidence on how productivity in UK financial services is affected by increasing socio-economic diversity at senior levels. Together with data on current socio-economic diversity, this will create a business case for change.
We can see from other sectors the benefits of working together to solve a common diversity challenge. Law firms, for instance, have created a group that allows members to benchmark the socio-economic data they collect, share effective practices, and navigate the various partner organisations which can provide insights and support. An equivalent collaboration is required in financial and professional services. The City of London taskforce seeks to develop such a membership body and financial services firms should engage with it once launched.
Firms could also collaborate more with organisations that provide pathways into financial services for young people from under-represented groups. Examples include the Sutton Trust’s ‘Pathways to Banking and Finance’ programme and graduate recruitment firm Rare. The Sutton Trust proves that young people from lower socio-economic groups benefit tremendously from having access to and information about careers in professional sectors such as banking. In this way, businesses can ensure they are attracting a more diverse range of talent into their sector.
Creating inclusive working cultures and promoting equity of progression cannot be the delivered by HR teams alone. It requires senior engagement, sponsorship, and role-modelling. Research on gender equity shows that mentorships and sponsorships help large corporations retain people who are not part of the dominant group. Sponsorship enables changes at the top to happen faster and sets an example that cascades and multiplies through the organisation.
People from a lower socio-economic background who have made it to the senior ranks should be encouraged to think about sharing their story. They may have adapted and assimilated to the norms, for example changing their accent, so that it may not be obvious to junior colleagues that there are people like them succeeding at the highest levels.
The time to start is now
When it comes to socio-economic diversity, financial services companies have no time to waste. They must not wait until they have more data before starting to take action: Change needs to happen fast. Many of the actions we describe above can be implemented in a relatively short space of time. Companies that do so will soon find themselves with a clear competitive advantage.