Speaking to the Treasury Select Committee of MPs, FCA chief executive designate Nikhil Rathi blamed group think and a lack of diversity for contributing to issues within the financial crisis ten years ago.
Giving evidence before his formal start with the regulator on 1 October, Rathi emphasised the importance of diversity of thought within the regulator itself and the whole of the financial services market.
He said there had been some progress, including the Women in Finance Charter, but stressed there was still a long way to go and warned the FCA was willing to take action to see this happen.
“The FCA has a role to support a more diverse financial services sector and this is a conversation that has been evolving in recent years – the women in finance charter is one very important initiative,” Rathi said.
“But I think it is in the interest of the whole industry to consider its leadership, to consider if it is properly reflecting the society it serves.
“I would have an expectation over the coming years to see boards, to see the leadership of major financial institutions working hard on these issues to deliver diversity and change culture.
“And if we are seeing that progress not happening then at some point it becomes a supervisory matter and it may even become a matter that we would need to deal with in how we approve an appointment or not,” he added.
Group think contributed to financial crisis
Rathi underlined the lack of diverse voices in the industry was producing problems and bad outcomes.
“Group think is a big challenge in financial services. There is sufficient academic evidence of sufficient calibre now to think that where you have diverse leadership teams you get better decisions,” he said.
“And there is a historic tendency for people to recruit from similar backgrounds to themselves which creates group think and I think that was definitely a contributor to some of the issues I saw close-up in the 2008-09 financial crisis.
“I think its improved, but it is a responsible supervisor that will challenge on those issues.”
He noted too the impact of the Black Lives Matter movement which “has really touched a nerve in many organisations where colleagues are beginning to speak up much more openly about these issues”.
“Becoming comfortable having uncomfortable conversations in large organisations is going to be very important in the coming months and years to address these issues.”
FCA talent pipeline
Specifically within the FCA, Rathi said he would be leading on diversity and expected the entire executive team to follow suit.
He acknowledged there was an issue with the talent pipeline through the FCA in how talent is attracted and how talent is developed.
“The FCA is dealing with some complex policy problems and diversity of thought is going to be critical to be able to deal with those problems,” he said.
Rathi noted that the FCA is a national institution and that it was “incredibly important” the FCA reached out to all the nations and regions of the UK.
“There is an opportunity now with the experience from remote working to think creatively about how resources and talent for the FCA can come from many more parts of the UK than historically.
“And making sure that talented colleagues have strong mentoring,” he added.
People feel comfortable being themselves
Actions that will be considered within the FCA include a review of the recruitment process including the shortlisting process and who is involved in major recruitment decisions.
Other approaches such as unnamed CVs and unconscious bias training will also be considered to ensure shortlisting is based solely on merit and qualifications.
The ethnicity pay gap of 28 per cent for non-white employees will be in the headlights, while the proportion of people who feel comfortable being themselves at work will be specifically targeted.
And in recognition of the changing shape of the industry, top talent will also be aimed at smaller firms.
“I want to make sure the best people want to work on supervising small firms, not just the big firms, I think that’s going to be a very high priority, high profile part of the work,” he added.