DEI backlash should not stall efforts to tackle toxic behaviour in financial firms

The new US administrationʼs cancellation of diversity, equality and inclusion (DEI) initiatives should not lead to misconduct at financial services firms being tolerated, one industry grandee said today.

“I really hope and pray that the backlash against DEI that weʼre seeing isnʼt used as some sort of excuse to not tackle conduct and behaviour issues,” said Baroness Helena Morrissey, chair of The Diversity Project.

Morrissey, who was speaking during a panel discussion at the City & Financial 10^th annual culture and conduct summit in London, said while “data around DEI might be controversial”, this was no reason to allow misconduct or bad behaviour.

In 2023, the Financial Conduct Authority (FCA) launched a consultation on diversity and inclusion in the financial services sector. This encountered considerable pushback, including from lawmakers on the Treasury Committee, who suggested it would be better for the regulator to concentrate on tackling non-financial misconduct rather than collecting DEI data in its Sexism in the City report, published in March 2024.

Delivering a keynote speech at the summit, FCA chief operating officer Emily Shepperd announced the regulator would “shortly” set out next steps in its effort to clamp down on non-financial misconduct

According to Angela Hayes, a partner at law firm DAC Beachcroft, financial services firms were at different levels of maturity to one another in tackling non-financial misconduct. “We have worked with investment banks, we’ve worked with institutional asset managers, insurers, insurance brokers and we really do see different approaches,” she said.

Hayes said that in her experience, investment banks had zero tolerance for non-financial misconduct. “That’s not to say things don’t happen. But they are dealt with quickly and decisively, whereas other sectors are perhaps less confident and more uncertain about what they should be doing.”

False narrative

Mary O’Connor, a non-executive director at investment operations firm Carne Group, said more needed to be done to push back against the “false narratives” that often spring up when individuals are dismissed for non-financial misconduct but a non-disclosure agreement (NDA) is put in place.

“At a minimum, boards need to understand the terms and the use of NDAs. How are they being used in your company? You need to understand, when theyʼre being used to silence victims and make sure that that doesnʼt happen — and understand when youʼre allowed to respond [to false narratives] so that you arenʼt a victim yourself,” O’Connor said.

She said in the past she had had to explained to a third party that an individual who had created a false narrative around his departure from a company was actually dismissed following an internal investigation. This was possible without breaching the terms of the NDA between the individual and the company O’Connor said.

The Diversity Project is currently trying to gather information on the extent to which NDAs are used by financial services firms.

Board information

Michelle Scrimgeour, former CEO at Legal & General Investment Management, said when misconduct was not dealt with it reflected badly on senior management. The non-financial aspects of a company’s performance were “absolutely financially material”, she said, adding LGIM had holdings in “just about every UK company”, which allowed it to observe both good and bad examples of governance.

This enabled LGIM to develop a culture value scorecard, which pulled together data from across an organisation to give its board a clear picture of its culture and how it is changing over time. “It allows the board to hold the executive team accountable by measuring against cultural metrics, not just financial ones,” Scrimgeour said.

In October, the FCA published the results of a survey on non-financial misconduct at firms, which showed firms were not recording incidents in a uniform way. Around 41% of incidents were categorised as “other”.

Expectations

O’Connor said she hoped the FCA would give a clear picture of what it expected of a board and executives when it sets out the next steps of its non-financial misconduct agenda.

Scrimgeour agreed, adding that the regulator needed to hold firms to account. “What is really shocking to me is that — given that we have the [Senior Managers’ Conduct Regime] and the regulator has been pretty clear on what fit and proper means — we are still talking about this.”