(mis)Conduct, Money & Reputation

Dissecting misconduct in financial services, from the rules and regulations - to the reputational fallout when things go wrong. This podcast series is an essential listen for those in asset management (and more broadly financial services) who are responsible for the safeguarding of business and brand; from compliance and corporate affairs to comms and marketing.

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Episode Background

E04: Diversity, financial crises and conformity

Building a business with a diversified employee base is no longer a nice to have, its necessary, both in terms of talent retention but client retention as well. The regulator is also insisting that financial services firms put in place evidence-based diversity and inclusion strategies that take into account the individual firm's progress on these efforts. 

The reputational hazards are many. Reputation is mostly driven by behaviour and if you claim to building a diverse team when you aren’t, the regulatory and reputational fall out are clear. And in a world where the war for talent is raging harder than ever, firms that that fail to develop progressive employment strategies are likely to fall behind. 

Furthermore, the evidence is stark. Diverse teams outperform. 

In this episode, Neil Robson, partner with law firm Katten, and David Masters of reputation specialists Lansons/Team Farner delve into the increasingly knotty area of DEI, from the perils of over claiming and under delivering, to the increasing scrutiny around non-financial misconduct.

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Episode Transcript

David Masters: Hello and welcome to the latest episode. This is our fourth episode in a new series for those working in financial services, particularly in and around asset and wealth management, where we seek to navigate a path through some of the more complex issues where regulation and reputation intersect. 

Today, we're tackling the issue of diversity and in reality, often the lack of it and the regulatory and reputational challenges this brings to the investment sector. 

My name is David Masters, director and asset management lead at reputation consultancy Lansons/Team Farner.

Neil Robson: And I'm Neil Robson. Financial Services Regulatory Compliance partner at international law firm Katten.

David Masters: Great. So, I mean, diversity is not a small topic, you know, and I daresay we're not going to cover everything that we possibly could do in 25 minutes. So hopefully this is a topic we can revisit with some guests. 

Now, the Diversity Project lists 15 different dimensions of DEI, diversity, equity and inclusion. These are - gender, ethnicity, neurodiversity, LGBTQ +, disability, 50+, #TalkAboutBlack, early careers, menopause, mental health, returners, military veterans, social mobility, working families, and smart working.

So there's a huge amount there. But to give us a little bit of context, Neil, what what's the regulatory take on this?

Neil Robson: The FCA has been a bit slow on the uptake. In reality, it's probably only the last five years that they've really focused on this. And in fact it was December 2018 that the director of the FCA’s Executive Diversity Committee, Christopher Woolard, gave a speech about ‘Opening up and speaking out’, diversity in financial services. That's five years ago, he recognised at that point in time that diversity is now not a nice to have, it's merely a necessity among modern financial services firms.

So things are moving in the right direction. But as I say, progress has been pretty slow. And what's really, really interesting is it's only the last two years things have ramped up in a really big way. So back in July 21, the FCA put out a paper diversity inclusion in the financial sector, ‘Working together to drive change’. A really positive, forward looking, 'how should we as a sector be regulating financial services to make sure it's truly inclusive?’.

That took two years until September this year, when the FCA published its new consultation paper based on the feedback it got from the 2021 consultation or discussion paper, and they've now put out some proposals which I think are actually really positive and very forward thinking. So in terms of what does it mean, what are they proposing? It really comes down to two things.

One, I'll skip over quite quickly. So what they've now done is propose that actually non-financial misconduct, which of course we discussed at length in the first episode of the series, following on the Crispin Odey allegations and morally reprehensible behaviour, as the FCA refers to it in the financial sector; that's now being baked into the FCA conduct rules, being baked into the fitness and propriety assessments. It's going to be baked into regulatory references, so that conduct which is outside financial services. 

So again, if we focus on Crispin Odey, allegations of an improper nature, sexual misconduct that will be baked into the FCA rules going forward.

David Masters: I think it's really interesting, isn't it? The non-financial misconduct, as you said, that's where we kicked off our series, because if you look at all the cases we discussed, and obviously the Odey stuff is allegations at this stage only.

But if you look at everything we discussed, all the individuals who have fallen foul of non-financial misconduct have been men. And in the vast majority of cases, the, what they have been disqualified for was behaviour which could be at least described as misogynistic. That's not absolutely all of them, but the vast majority of them, you know, sexual violence, etc..

But what are the FCA doing then? How is this going to pressurise businesses under their regulations? How are they going to need to create greater diversity or what are they going to need to show to be doing?

Neil Robson: So the other half of the consultation paper which is on the diversity initiatives, if one calls it that, is that they're now recognising that although many firms actually have diversity and inclusion strategies in place and they have policies or mission statements, they're going to require all firms to do this because they say they recognise that there would be significant benefits to the financial services industry that flow from a strategic approach across the whole sector.

So they're going to apply the rules in different ways, to different sizes of firms and all large firms who they refer to as those with 251 or more UK-based employees. And that threshold is basically set at the same level as the gender pay gap reporting requirements. So they've sort of aligned this new approach in the same way as some existing legislation. 

But what they're proposing is that if you're a large firm, you must put in place evidence-based diversity and inclusion strategies that take into account the individual firm's progress in diversity and inclusion. So the strategy has to set objectives and must have clear goals with a plan as to how the firm actually is going to meet those and actually how it's going to measure its own progress.

Positive arrangements in place to identify the obstacles and also making sure that all staff in the firm, 251 or more staff say across the UK, all those firms have to understand what the strategy really means for each of them. So it's quite interesting that they're putting this into effectively mandatory disclosure rules. But actually when you read the small print, it's not all going to be quite so mandatory because they're actually giving a lot of flexibility to firms initially because the way the FCA and the PRA recognise this is that it's not one size fits all at all.

If we're looking across all financial services firms operating in the UK, if you just take the asset management sector, we're actually talking the biggest firms who are going to be required to do this. Smaller firms have the option to opt in or not. And what's really interesting, as I say in terms of this sort of proportionate approach is that the FCA and the PRA are saying, well, we recognise that targets play an important role, driving progress by encouraging a focus on each firm to reach diversity goals and enable progress to be measured.

So that's, I think, very positive and that's something that has to be applauded, I think. But what they've done is they're saying, okay, we want you to set diversity targets, particularly to address underrepresentation, both at board, senior leadership and employee population level, but which demographic characteristics each firm should cover is going to be left down to each individual firm.

 They've got the option as well for you, for you firm A or for you firm B, your demographic targets might be different to one another. So we're going to let each firm choose its own targets. Now, the interesting again thing here is that there's a public sort of reporting element to this so that the public customers of these firms can say, okay, well, last year you said you wanted to get 50% of the board to be female. So there's gender equality at board level.

You've reported your data this year and you've not achieved that. Why have you not achieved that? Okay. They may have reasonable answers for that, but at least it means that there's going to be questions asked, presumably at AGM’s by shareholders. And ultimately shareholders care about this sort of thing because at the end of the day, customers, investors, man in the street is voting with his or her feet.

David Masters: Yeah, absolutely. And this this is this is the reputational challenge and it's really interesting. So just before I jump back onto that, it's very interesting because both the Diversity Project and some recent investment association research has highlighted is that there are still a rump of firms who are not doing anything material to address diversity issues.

But it is a major reputational challenge because I think we've seen with Odey, with CBI, the FT stuff about Leon Black at the moment in New York, particularly in this sort of misogynistic area, it's a major reputational challenge when these behaviours happen.

But these behaviours happen, as we were saying, with things like the allegations with Crispin Odey because things become normalised. If you're not seen to be making the right moves in towards diversity, then it does hit the bottom line because it's something that your clients want, whether they're institutional investors or whether they're retail investors - they want to be associated with businesses that relate to them.

Talent is the same. It hits you with talent in that battle for talent as well. These people want to work for a business which they can understand, which relates to them, which allows them to be themselves and to express themselves. And this has been a real challenge for the investment industry over the last few years. 

The investment industry looks like it does today because 40 to 50 years ago, that's what it's client base looked like; white generally, rather middle-class men. And society has moved on tremendously from that and is continuing to move on. And asset management industry hasn't really kept pace with that. So, what you get is a number of challenges.

So, if we think about how technology is impacting asset management at the moment, asset management has always struggled around technology. Great investors in technology, not necessarily great at applying technology – Absolutely. And innovation within asset management has been very narrow. It's been great. 

And you can see in some tech sectors, if you think around systematic quantitative investing, you think of CTAs and things like that. There've been some, you know, tremendous progress made in so the application of science.

But in terms of technology, very poor and losing that battle for talent. And if you think about it now with the shakeout that we've had all these big tech firms, what a great opportunity for the asset management industry to start to be able to attract some real big hitting talent in the tech world.

Is it doing that? Is it doing that effectively?

Do people who work in tech, do people who've worked for Google or for one of the big tech firms, do they look at the asset management industry and go, ‘that looks like it's for me, that looks like it's relevant to me. I understand what that does’. No, I don't think it does.

I think also, you've got this issue around decision making as a business. So we've touched upon the idea of relevance, relevance to talent, relevance to your clients. If you're not increasingly diverse, you're decreasingly relevant to your to your audiences. And I think the other point here is that as businesses, particularly as asset management industry consolidates, particularly as asset management firms get bigger and the big firms are getting bigger; systemic risk is a major issue.

Well, if we travel back in time, 15 years to the global financial crisis, a lot of people saw this problem. Huge amounts of people now say, we did see that there was a problem, but very, very few people acted upon that. And why was that? Well, largely they were white men of similar educational and cultural backgrounds.

If you look at the film 'The Big Short', or read the book 'The Big Short', which is probably my recommendation above the film (although the film is tremendous as well). Who's the main protagonist of that? Ultimately it’s a hedge fund manager called Michael Burry, who is Neurodiverse, but he was the only one really, of all those people who said, ‘Well, there is something different and I'm going to act upon that’. Lots of people had seen what he'd seen, maybe not to the same level of detail, but they had seen what he had seen and decided not to act. And I think if we think about systemic risk going forward, we need to get away from this groupthink which has affected the asset management industry.

Neil Robson: But what's interesting, I absolutely echo what you say there and what's fascinating about the FCA's consultation and its proposals for diversity and inclusion is that the FCA actually says that matters relating to diversity inclusion should be considered looking forward as a non-financial risk - a risk that firms must address. 

Absolutely spot on. And it's a shame it's taken this long for them to address it. But it has to be seen as positive. And going back to your comment earlier that, there's perhaps lip service paid, but actually not a lot of follow through. Things aren't as effective as it could have been. I've got some stats here from last year, 2022, where Agility in Mind surveyed all FTSE 100 firms.

So I know this is not all financial services and certainly not all asset management, but they focused on the FTSE 100 and they said that despite all of them, 99% of them having an inclusive mission statement, they found that actually 48% of them, so very nearly half, didn't have diversity and inclusion initiatives that really followed through are really positive to the workforce. 

Now, obviously, that may have changed in the past 12 months, but nonetheless, it's fascinating because, again, to go back to your comment about neurodiversity, only 4% of the FTSE 100 actually had a neurodiversity initiative based on the stats from last year.

David Masters: Neurodiversity, obviously, is one of those things that's really interesting in financial services because there is this there is this stereotype of what neurodiversity is. So people seem to think of 'Rainman', that sort of high achieving maths brain, but the reality is so much different to that.

Neil Robson: Well, the old fashioned phrase ‘They’re on the spectrum’. Yeah which meant that of course it's a spectrum. You've got one end to the other and everyone sits on it somewhere. But I think neurodiversity is about celebrating people who perhaps think a little bit differently. And how can you make the most of it?

David Masters: Absolutely. Which brings us back to Michael Burry. But also a lot of people would say that some of the attributes of neurodiversity are almost like superpowers, particularly in financial services, not just because of the maths, but because of the levels of focus, etc.. But actually though it's highly stereotyped because lots of people who are neurodiverse are highly empathetic, in fact extremely empathetic, rather than be lacking in empathy, which I think is the opposite of the 'Rainman'.

It's a really interesting one. And, you know, I have to put my hand up to The Diversity Project, they’ve some really interesting and excellent work in here on neurodiversity. But it's something where clearly I think what they came out with is not only are like one in six people working in financial services neurodiverse, but less than half that is disclosed. I think that's the correct analysis of those numbers. And it is the data around this which is going to be challenging. 

So you think about what the FCA's challenge to the industry, a lot of that is going to be around data, and then is how do you get that data? Because ultimately it's what you're really asking is how do people self-identify?

Neil Robson: That's a really good point. And it's something that the FCA and the PRA focus on in their diversity and inclusion consultation papers because they say, well, there's going to have to be a core reporting requirement. So these proposed rules would basically say, okay, well you've got to report how many employees you have, that's across the board. Doesn't matter what size firm you are. 

Obviously, if you've got 251 or more, then you've got to do all these additional disclosures. Larger firms those over the threshold 251+ have to report annually to the regulator on all sorts of matters. So data on age, ethnicity, sex, gender, religion, sexual orientation, disability, or long term health conditions.

The world has moved on, but the FCA and the PRA are playing catch up. This I think it's got to be seen as a positive because ultimately and again we can refocus on risk, this is a non-financial risk. This is something that all firms should be really focused on and concerned about, because if the risk of getting it wrong, certainly if you're a big, listed company, if you're an asset manager listed on the FTSE 100 or elsewhere; your shareholders could flee if you do something really bad.

David Masters: It is interesting as well because ultimately when we're talking about data, really what we're talking about is aggregate data across a business. But that doesn't tell you where diversity is in that business and where diversity isn't. So if you think about most asset management businesses the major cost centre of most fund management businesses, most wealth management businesses is around portfolio management, whether that's, running funds or running client portfolios.

Business development is another huge one because as we've talked about in the past, this is an industry where products are sold or not bought. So there's a lot of emphasis on direct selling, on interpersonal relationships, etc.. So a lot of resource goes into those sort of sales teams, business development teams, etc., much less into the rest of marketing, I should point out. 

And then obviously you have the leadership team as well. And if you strip out the portfolio management for most asset managers, you will find that the rest of the business - fund, admin, back, office marketing, etc. is much more diverse than those core, core business areas.

Neil Robson: So that follows through as well to lots of other sectors. I mean, if you take legal, just taking my firm I mean the partnership team is mostly white, mostly male, not all, but mostly but then if you look at the support staff, the support professionals who work with us to make sure that we can actually do our jobs, they're far more diverse than we are.

And people from all over the world, people from different perspectives of the universe, but they help us do our work. So they're critical to the business. But the challenge in the legal profession is...

How do we get more people of colour? How do we get more people who have other sort of ethnicity or diversity sort of factors that they might self-identify with? 

How do we get them up into the partnership level? How do we make them part of the leaders of the business? 

They've got to start all the way through it, I guess at school level. They've got to want to study law or study something else and then transition into law.

David Masters: I mean, I could say the same about the reputation management industry. Gender is probably less of an issue, and Lansons/Team Farner is by far a female dominated organisation. And the split between male and female, men and women on the board and split between men and women throughout the company is relatively the same. It's not like, say, nursing, particularly nursing 20 years ago, where at entry level it was it was mostly women, but at the senior level in nursing, particularly on the board and things like the RCN, it was it was male dominated for years.

But obviously it's a bit white, middle class. The reputation management industry, I think I can say that it’s getting better. All the businesses I see out there are making progress. But I think there is a , there is a challenge where the investment management industry needs to address these sort of core areas quite directly. Because we know, for example, there's plenty of academic research out there now that says that diverse investment teams perform better.

And there have been there have been, you know, asset management businesses in the US which have had that as actually a sort of focal point of what they've been doing. You know, they have had more diverse teams. But it's also about bringing in people. Again, we're back to this groupthink issue, who look at things a bit differently, who think about it differently.

Neil Robson: Who approach a problem in a different way and perhaps come up with a solution that the traditional portfolio management sector might not have thought about.

David Masters: Yeah, absolutely. And that gender isn't, and we shouldn't think about gender as being the primary driver of that because, you could have a female lead, a team leader or CEO or whatever. But if the rest of the business doesn't really reflect that level of diversity, then it starts to look like it's not sincere or it's a tokenistic move. And there are plenty of businesses where the makeup of the board or the makeup of the senior team does not reflect the business overall.

And I think that's quite a common challenge. So it is about getting these teams within the businesses to be much more reflective of society and to be much more reflective of, you know, a different approach and different ways of thinking. And there have been some great initiatives over the years. You know, Investment 2020 is now part of The Diversity Project. 

But those sort of initiatives over the years have been really important. And in fact on the subject of the diversity project, their current one brings us back almost full circle to what we started talking about, which was non-financial misconduct. So they've got a safe space initiative, which is allowing people the opportunity to talk freely about, bad experiences and poor behaviours within the businesses they work for. 

And that's very, very much driven by CBI and Odey and all these other cases that are coming to light. So there are all these catalysts for change, but it is going to take time. And I think, just coming back to reputation again, it’s important to have, we’re talking about the data, we're talking about the regulatory requirements. So it's not just about numbers, it's how well, what story are those numbers telling?

Neil Robson: That’s why disclosure and actually explaining what the data means to that firm at that point in time and then acting on it and following up on it going forward. Yeah.

David Masters: And that journey that you're on. Because I remember when gender pay gap data started coming out and asset management firms looked terrible. Even those that were disclosing that didn't need to disclose - it did not look great for the industry. And everyone was saying, you know, obviously we're looking to make improvements, but it's difficult, blah, blah, blah. 

We're trying to do things. And there is a climate too, to sort of be able to manage expectations a little bit because the reality is when you're making these changes, not everything is going to move in a in a smooth straight line.

There are going to be periods where progress is much better and they're going to be periods where progress is much harder. And, from a statistical or data point of view, it may even appear not just to be not moving, but may be moving in the wrong direction. And again, there's some AI research which shows that there's been very little movement over the last couple of years in terms of hiring of women into senior positions.

So it's about how you tell your story and it's about how you use those numbers to make those stories. Because ultimately what we've got to think about is what's the purpose of the asset management industry? 

The asset management industry here is about the future prosperity of the planet, really, whether that's from a climate change perspective or whether that's just simply people being able to have a secure long term financial future.

So ultimately, that's the heart of it. And if you can't deliver that on a diversity basis, then you're not really delivering it at all. It’s part of the problem I think from a reputational point of view. I think also the idea that we move away from where the asset management industry has got to today, that things might start to change.

I mean, they may sound like small things, but it's not that long ago that you went onto a fund management website and the imagery was vintage cars and, sailing boats and those sort of things. And just think about how many asset managers have some sort of sailing imagery in their logo or something like that, the amount of boats, sails, etc. and the language that we talk about, the language that's commonplace to asset management, which is very, again, headwinds, tailwinds - it's very elitist ultimately and very male-centric in its origins.

If we think about where the asset management industry needs to go, it needs to tell its story in a different way. It's not just about numbers. It's got to be about how you tell that story to different audiences in a way which is going to resonate with them.

Neil Robson: And actually that the concept of a story, telling a story. But to bring it back to what's the risk to the business? Well, the risk is of course, you tell a story that's not true. When we talked in the greenwashing episode about the risk of saying things you were doing that actually weren't the full story, scenarios where a particular bank got slapped down by the Advertising Standards Authority because it said it was planting millions of trees – ‘but yeh you also invest in oil and gas, so big CO2 emitting businesses’. That was bad.

So a particular bank was interviewing candidates for mortgages, said that it was actually interviewing lots of African-Americans and that it was committed to equality across the board. What actually happened was is that it turned out that, in fact, they were rejecting African-American applicants at a significantly higher rate than white Americans who are applying for mortgages. When that became public, the share price dropped 10% in a day.

All these pension funds who have fiduciary duties to their to their investors, to the pensioners, to maintain pension values, they all sued the board because the board was saying one thing and yet doing something entirely different. And the fact that it was referred to as a ‘sham, nominally fulfilling a policy only after media coverage’ - that is telling.

If you're telling a story, it needs to be both true but also the right story. And again, I can't think of a specific example with an asset manager right now, but if you imagined an asset manager doing something along those lines, that would be pretty devastating both for the business because significant portfolio managers would probably leave and go to another business where they were considered to be more welcome. And investors would leave.

David Masters: Absolutely. The big institutional investors who are all looking at diversity, culture, etc., as part of their RFPs. So part of the criteria which they take on a manager is yes, that would be that would be potentially fairly fatal in terms of the business outlook for any fo phone company. But without wanting to sound too negative, you can almost see it happening.

The fact that the regulations are now being put in place, we talked about that with some of those banks in the greenwashing episode, as you mentioned, whereby they were saying one thing, but they weren't doing it. People saying that they're making efforts to increase diversity and increase inclusion within the business and not doing it well.

Neil Robson: The stats are going to start reflecting that because these are going to be mandatory disclosures under the proposals from the FCA and the PRA. So actually, year on year, if you're a big institutional investor, you'll be able to look at the asset managers you put your money with and say, ‘well, hold on a minute. You say you're making efforts to do this, that and the other. The numbers don't reflect that. 

So why haven't you had more neurodiverse people? Why haven't you hired more people who are LGBT identifying how? Why haven't you hired more women at board level if you said you were going to?’ 

And actually I think that that means that people will vote with their feet. Investors will start putting pressure on asset managers to make sure that they follow through.

David Masters: Yeah, absolutely. Absolutely. So that's all we have time for today. Thank you very much, Neil. We will be back in a few weeks’ time with more interesting areas to discuss about the overlap between regulation and reputation. Thank you.

Neil Robson: I've been there Neil Robson.

David Masters: And I'm David Masters.

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