Progress Together is calling for regulators to compel employers to collect data on the socio-economic backgrounds of their employees.

This is in response to the FCA and PRA’s diversity and inclusion consultation, which closes on 18th December.

We’re calling on organisations to join us pushing for socio-economic data collection to be a mandatory requirement for financial services firms with more than 250 employees.

Here’s our comprehensive, evidence-based response in full (we have responded only to the questions relevant to Progress Together’s values and aims):

 

Introduction

Progress Together welcomes the opportunity to respond to the FCA and PRA Consultation Papers on diversity and inclusion published in September 2023.

Progress Together is a not for profit membership body which focuses on boosting senior level socio-economic diversity in financial services. We were formed as a result of the Socio-Economic Diversity Taskforce led by the City of London Corporation. Our peer to peer network is represented by 40 member organisations from across the UK financial services sectors and we are growing all the time.

We want to create a UK financial services sector where career progression is led by job performance not where employees start out in life. Our members are working towards creating a workplace where people from all backgrounds can progress, irrespective of their background. The FCA and PRA’s proposal to use their regulatory powers to improve the diversity of the financial sector supports our ambition to drive change.

We firmly believe that socio-economic diversity is a vitally important part of the diversity agenda. Evidence shows that greater diversity leads to better decision making and outcomes for firms, customers and investors.

Our response focuses on elements of the consultation papers that relate to socio-economic diversity and we have chosen not to respond to all aspects of the proposals.

 

Q6: To what extent do you agree with our proposals on data reporting for firms with 250 or fewer employees, excluding Limited Scope SM&CR firms?

 We agree with the proposals that the additional data reporting requirements should be required for larger firms rather than for firms with 250 or fewer employees and that Limited Scope SM&CR firms should be excluded. We would suggest that guidance is included in the final rules for smaller firms and Limited Scope SM&CR firms that it would be best practice to follow the additional requirements for larger firms to fully understand the diversity of their workforce and to identify where intervention may be required.

We note, however, that data is proposed to be reported at an entity level which creates a risk that the data will not be provided for groups of firms that are altogether large but have 250 or fewer employees across each of their regulated entities or where employees work across multiple entities. The proposals should be enhanced to require firms to consider the employee population at group level when gathering, reporting and disclosing the data.

 

Q8: To what extent do you agree with our proposals on targets?

 We agree that targets are an important factor in developing diversity in the workforce and for driving change. The proposals to require firms with 251+ employees to set targets are welcomed and that targets should be set across the whole workforce.

However, in our response to question 11 below we confirm our views that socio-economic background should not be treated differently from the other proposed mandatory demographic characteristics and should also be mandatory. As a result, setting targets on socio-economic background must also be included in the targets firms are required to set and that firms should be required to set targets for all mandatory characteristics rather than the proposals for setting targets for just one characteristic. By limiting target setting to one characteristic creates a missed opportunity to understand the intersectional nature of socio-economic data and how this can play a key role in providing richer insights that firms can act on.

The Women in Finance Charter has shown that by setting targets, improvements in diversity can be achieved and the guidance the Charter provides is welcomed by participating organisations. While we agree with the proposals that firms should set their own targets, more guidance is needed for firms on what the regulatory expectations are. In particular, the definition of senior leadership as one of the data sets proposed is unclear and requires further clarity in order for there to be consistency across firms and to support peer analysis.

We suggest that publicly available information from those organisations and financial services firms that are leading the way in setting targets could be drawn upon to support regulatory guidance. For example:

  • The Social Mobility Commission publishes starting points for socio-economic background at entry, junior and mid-levels and the Socio-Economic Taskforce advocates that 50% of employees at senior level should come from a lower or intermediate socio-economic background by 2030.
  • Santander’s socio-economic diversity target is for 35% of senior leaders to be from low socio-economic background by 2030.
  • Schroders’ target is for 25% of senior leaders to be from non-professional backgrounds (which includes working class and intermediate parental occupations) by 2030.
  • The Solicitors Regulatory Authority utilises its diversity data tool which provides an easy way to view diversity information about firms by population and diversity category which could be leveraged to understand the socio-economic diversity of other sectors when considering targets.

Guidance should also be provided that firms should utilise organisations, such as Progress Together, that support the diversity and inclusion agenda to share best practice on setting targets. We would welcome the opportunity to partner with the regulators on supporting the approach for socio-economic targets and data collection.

 

Q10: To what extent do you agree with the list of demographic characteristics we propose to include in our regulatory return?

 We do not agree that socio-economic background should be a voluntary data reporting requirement in the regulatory return. Our reasons for this are provided in response to question 11 below.

Notwithstanding the extent of the evidence we have provided to support the mandating of socio-economic background, at the very least regulators should set out a timeline when the proposed voluntary data will become mandatory. This is especially important when there would need to be another consultation process for any amendments to the rules implemented following this consultation and the extended length of time that this would invariably take.

Further guidance should also be provided on what firms should be doing once data on all of the demographic characteristics have been gathered. There is limited information provided on the regulators’ expectations for taking action as a result of what the data is showing. We would welcome guidance for example, on the expectations on considering pay and progression gaps. This is important given the Social Mobility Foundation’s research that professionals from working-class backgrounds are being paid less than their more privileged peers in the same occupation, £6,291 – or 12% less – a year. This means that they effectively work 1 in 8 days for free.

 

Q11 To what extent do you agree that reporting should be mandatory for some demographic characteristics and voluntary for others?

We welcome the fact that socio-economic background is listed as a demographic characteristic.

Both regulators acknowledge in the consultation papers the importance of diversity and inclusion in the financial services sector in meeting their statutory objectives. For the FCA this includes:

  • securing an appropriate degree of protection for consumers
  • protecting and enhancing the integrity of the UK Financial system
  • promoting effective competition in the interests of consumers and facilitating the medium to long term growth and international competitiveness

The PRA’s objectives include:

  • promoting the safety and soundness of the firms they regulate
  • policyholder protection

However, we disagree that socio-economic background should be treated any differently to the proposed

mandatory characteristics and the proposals that socio-economic background should be a voluntary reporting requirement. Our reasons are set out below including how this evidence aligns to the regulator’s objectives.

  • The proposals do not align with the recommendations of the Government-commissioned socio-economic diversity taskforce, led by the City of London Corporation.

The taskforce recommended that regulators mandate data collection and publicise data of workforce socio-economic background amongst regulated organisations. See full recommendations here.

Evidence from the Bridge Group, in partnership with the PRA and FCA, shows that employees from working-class backgrounds progress 25% slower than peers, with no link to job performance. Aside from the implications for competitiveness and innovation, this is inherently unfair.

The proposals are out of step with other regulatory bodies. The Solicitors Regulatory Authority has mandated the collection of socio-economic data since 2013 and data is reported in almost 100% of cases. Mandating data collection for this length of time has supported the interventions needed to improve the socio-economic diversity of the sector. Law is the best represented sector in the Social Mobility Employer Index Report 2023.

The Institute of Chartered Accountants in England and Wales has been collecting data on socio-economic data for probate services since March 2015. In its report ICAEW Probate Diversity Statistics 2023 93.7% of respondents to its question ‘Thinking back to when you were aged about 14, which best describes the sort of work the main / highest income earner in your household did in their main job?’ provided a response.

This demonstrates that data collection of socio-economic background is possible. But regulators need to lead the way by mandating collection and providing guidance on data collection similar to the government guidance on best practice when collecting, analysing and reporting ethnicity data.

While Progress Together members are the first movers in the collection of socio-economic background, a ‘best firms will’ approach will not support sufficiently fast progress in diversifying the financial services workforce, especially at senior levels. The Women in Finance Survey 2023 indicates that nearly 60% of signatories believe the Charter is changing the face of the financial services sector, but another quarter expected it would take another five years, and 15% said another 10 years. This experience could well be replicated for socio-economic diversity without mandating the collection of socio-economic background now.

We also acknowledge that socio-economic background was put forward by the last Labour government as a protected characteristic in the Equality Act 2010 but was effectively timed out following the change in government. The Labour Party’s fifth mission is to “break down the barriers to opportunity for every child, at every stage and shatter the class ceiling”. Should there be a change in government at the next election and socio-economic background becomes a protected characteristic as was originally intended, the rationale for focussing on the protected characteristics for mandatory data collection will be out of date and the industry will need to implement more change to catch up with any new legislation.

  • The rationale for not mandating reporting on socio-economic background data is based on 2021 data practices across firms but recent evidence demonstrates socio-economic background data collection is now more common.

Progress Together’s report “Shaping our economy: senior roles in financial services and socio-economic diversity” analyses socio-economic background data provided by 25 of its members. It covers 150,000 employees (14% of the UK financial services workforce) and is the largest ever dataset of this kind. The average response rate from employees is 49%. Many members are in their first year of collecting socio-economic background data. For those in their second or third year of data collection, the response rate is closer to 60%-80%.

33% of ABI members are now collecting socio-economic background data, and it’s growing each year. Likewise, in 2021 Women in Finance signatories collecting socio-economic background data was 12%, this was 26% by 2023. The Investment Association’s Equity, Diversity and Inclusion Data Survey 2023 confirms that 40% of firms are collecting socio-economic data. The Women in Finance Survey 2023 states that socio-economic background was cited as a top three priority by 36% of respondents which is up from 20% in 2021. This demonstrates that the data confirmed in the PRA’s consultation paper that just over 10% of firms were collecting socio-economic background data is outdated.

HR system providers such as Workday are responding to this growing interest by incorporating socio-economic background into their platform.

There is growing availability of credible data. Membership of Progress Together is now 40+ employers, representing over 30% of the UK financial services workforce. Members commit to collecting data on socio-economic background. Progress Together members have proved that successful socio-economic background data collection at scale is achievable.

  • Socio-economic background data can provide richer insights into other diversity characteristics which are proposed as mandatory reporting requirements.

There are important relationships between socio-economic background and other diversity characteristics. Progress Together’s report “Shaping our economy: senior roles in financial services and socio-economic diversity” provides evidence that socio-economic background has a much stronger effect on progression to senior roles in financial services firms compared with gender and ethnicity.  We also know that boosting socio-economic diversity can support corporate objectives around gender and ethnicity, and that females from lower socio-economic backgrounds experience a significant double disadvantage. This aligns with evidence from outside of financial services.

We know that cognitive diversity across senior management and on the board is required for sound decision-making, but without data on socio-economic background, the regulators and industry will miss the full picture.

  • More data is needed to evidence workforce socio-economic diversity.

The sooner financial services firms are required to provide socio-economic background data, the sooner the industry can evidence the impact of socio-economic background diversity to stakeholders. This fits squarely within the ‘S’ of ESG and supports the new Consumer Duty regulatory requirements as identified in the FCA Consultation Paper and the FCA’s consumer protection objective. Without a complete data set, stakeholders, including the regulators, will not have sufficiently good quality data to track and monitor diversity and identify the risks this represents.

Progress Together members are ahead of the pack, but the rest of the sector will lag without encouragement from the regulators. For the sector to boost competitiveness, we need the whole sector to push ahead on this, as this will create a greater source of senior-level diverse talent for every employer to tap into. Diversity of talent is acknowledged by the FCA in its consultation paper as one of the factors underpinning the international competitiveness of the UK financial services sector aligned to its secondary objective.

We recognise the challenge in collecting data. Therefore we are encouraged by the regulators’ use of ‘comply or explain’ and giving a good lead in time. Progress Together can also share tips on boosting employee response rates via its resources and events. The SRA’s approach in publishing the data collected via its diversity data tool is another way to support the financial services industry in the collection of data.

While we agree that it is equally important, in particular, to gather data on gender and ethnicity, this evidence demonstrates that those from a higher socio-economic background progress to senior management positions in financial services more often and more quickly. This still creates a risk of a lack of diversity in decision-making at senior levels in financial services firms when senior management is from the same socio-economic background.  Cognitive diversity leads to better consumer outcomes which is key in the FCA’s implementation of the new Consumer Duty rules and mitigating groupthink as identified by both regulators. While race and gender are important characteristics these do not guarantee the cognitive diversity needed to mitigate the risk of groupthink in the same way that socio-economic background does. These risks will not be identifiable without gathering the proposed mandatory demographic characteristics and socio-economic background data.

As recognised by the regulator’s proposals that a lack of diversity and inclusion should be treated as a non-financial risk, a lack of socio-economic diversity needs to form part of firms’ risk management frameworks. The current voluntary proposals in collecting socio-economic data could lead to the materialisation of this non-financial risk. This is because firms may choose not to collect this data and will not be able to understand what mitigating factors are required to address a lack of socio-economic diversity in their Board, senior management and workforce. This also links into firms’ overall strategic objectives, growth ambitions and customer outcomes.

While gathering the proposed mandatory demographic characteristics is a welcomed step forward, based on the evidence presented, we believe that limiting the proposed mandatory characteristics will not provide sufficient information for the regulators to understand the root cause of firms lacking a diverse leadership and workforce. We believe that socio-economic background is the golden thread and its intersectional nature will offer deeper insights and reduce the risk of groupthink in financial services organisations. For these reasons, we urge a change in the proposals so that socio-economic background becomes a mandatory reporting requirement for firms.

  • There is growing evidence that that socio-economic diversity will lead to a more commercially successful financial services industry

A clear business case, linked to productivity and competitiveness, was presented by taskforce Co-Chair and former Chief Economist of the Bank of England Andy Haldane.

In as early as 2017, Oxera’s report Social mobility and economic success: How social mobility boosts the economy found that social mobility is positively related to productivity. A modest increase in the UK’s social mobility, to the average level in western Europe, could increase annual GDP by approximately 2% in the long term. This is equivalent to £590 per person or £39bn to the UK economy based on 2016 prices. Comparing the UK to the next best performing country, the Netherlands, provides an even greater effect with an increase of approximately 6% in UK GDP equivalent to £1,650 per person or a total of £108bn again based on 2016 prices. This supports the PRA’s objective of a safe and sound UK financial system by evidencing the effect that a diverse workforce can have on the economy and how the financial services sector can compete internationally.

Blackrock’s research report Lifting financial performance by investing in women issued in November 2023 shows that companies with the most diverse workforces outperformed their country and industry group peers with the least-diverse workforces in terms of return on assets by 1.6 p.p. (29%) per year, on average, over the 2013-2022 period. While the research is focused on the effect women have in lifting financial performance, the report also states that other forms of diversity, including socio-economic diversity, may be equally important in creating a diversity of thoughts, skills and perspectives, enhancing the performance of groups and organisations.

Both regulators make clear in the consultation papers that diversity is needed to mitigate the risk of groupthink. The FCA indicates that groupthink can lead to weak governance and a failure to act in consumers’ best interests. The PRA provides its view that diversity and inclusion are important to governance and firm-wide culture. Blackrock’s research indicates that more diverse and inclusive firms help to reduce groupthink, therefore, meeting regulatory objectives.

Investors are increasingly asking for socio-economic data and it has been included for the first time in the asset owners diversity charter. By mandating data reporting the regulators will be helping the industry prepare for the growth in demands from stakeholders. If it doesn’t, it risks being an outlier (compared to other sectors’ regulators). This also supports the FCA’s operational objective in protecting and enhancing the integrity of the UK financial system through the challenge that investors will provide to firms on the diversity of their workforce and Board decision making.

 

Q12: Do you think reporting should instead be mandatory for all demographic characteristics?

We believe that socio-economic diversity should be included as a mandatory reporting characteristic due to the reasons outlined in question 11. Our mandate is to support the socio-economic diversity of financial services, therefore, we will not comment on the other voluntary demographic characteristics that have been proposed.

 

Q15: To what extent do you agree that disclosure should be mandatory for some demographic characteristics and voluntary for others?

We agree that disclosure of data is important to drive change in the financial services industry and will play an important role in helping firms understand how they compare to their peers. Making the information public will also support firms in the proposed regular review of the targets that they have set, identify outliers and create competition. This transparency will provide a strong incentive for firms to drive change and improve the diversity of the sector.

We do not agree that disclosure of socio-economic background should be voluntary for the reasons set out in question 11.

 

Q16: Do you think disclosure should instead be mandatory for all demographic characteristics?

We believe that socio-economic diversity should be included as a mandatory reporting characteristic due to the reasons outlined in question 11 and, therefore, should also be mandatory for the disclosure proposals. Our mandate is to support the socio-economic diversity of financial services, therefore, we will not comment on the disclosure of the other voluntary demographic characteristics that have been proposed.

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