Good afternoon ladies and gentlemen. I am very pleased to join you today and I would like to thank the Irish Fund Directors Association (‘IFDA’) for this opportunity to speak with you. Today’s event is an important one in the evolution of both the Association and the funds industry, and I am delighted to have the opportunity to say a few words to set a context for your discussions on the important topic of Diversity & Inclusion.
The Central Bank has supported the IFDA since its establishment in late 2015. As the representative body for independent directors within the Irish funds industry, the IFDA is an association of great potential, representing as it does the independent director community and with an the objective of advocating industry best practice in corporate governance and board oversight. Part of the IFDA’s role is to represent the interests of its members to other key stakeholders in the industry. In that regard, the IFDA provides a unique focal point for the Central Bank to engage with directors in the funds industry as a specific collective group. This allows us to gain an insight into the challenges faced and the issues affecting fund directors in the performance of their roles. It also allows us the opportunity to work more closely together for the advancement of good corporate governance in funds.
That the IFDA has chosen to champion Diversity & Inclusion in the funds industry is to its huge credit. Late last year we had the pleasure at the Central Bank of hosting a very useful and informative session on Diversity & Inclusion with the IFDA’s newly established Diversity and Culture Committee. At the session we discussed the important role of diversity on fund boards to foster sound decision-making, the Central Bank’s internal and external facing work on the topic, as well as our regulatory perspective on Diversity & Inclusion. We also discussed the objectives and planned work of the IFDA’s Diversity and Culture Committee and we explored opportunities for future collaboration and engagement, today’s event being one such opportunity.
Since then the IFDA has introduced its own Diversity Policy. The policy has, amongst other things, an objective to maintain a minimum of 30% women on the IFDA Board and to collaborate on sustainable initiatives to support improved gender balance in IFDA’s membership. In doing so, it is setting an example in its own organisation and behaviours that I hope to see borne out across the funds industry as a whole. We have also sought to set an example in this regard ourselves at the Central Bank, to which I will speak later in my remarks.
The Supervisory Context
First, however, I would like to position the discussion of Diversity & Inclusion in the context of the Central Bank’s supervisory priorities and the evolution of the funds industry more generally.
The Central Bank’s securities and markets supervisory mandate has been growing for some years now, both in terms of the rulebook and the nature, scale and complexity of what we have to supervise. We are seeing a similar level of growth in the funds industry in Ireland. This is reflected in the 1,117 new fund authorisations we granted in 2018, which amounts to more authorisations than in any previous year, and we continue to see this pipeline grow. While this increase in applications for authorisation of funds is not solely related to Brexit, it stands to reason that, as the UK leaves the EU and firms move asset management services to Ireland, those firms will also look to establish funds in Ireland where previously they might have established that fund in the UK. So, given our position as a significant funds jurisdiction it is incumbent on us to continue to ensure that we are effective supervisors of our funds industry. This in turn feeds into the delivery of the Central Bank’s mission of safeguarding financial stability and working to ensure that the financial system operates in the best interests of consumers and the wider economy.
That is why one of our strategic priorities over the next three years is to build an ever more assertive risk-based approach to conduct supervision of funds. Since the start of 2018, our conduct supervision of funds has overseen almost €5.2 million being refunded by Irish funds to investors and we have imposed 18 formal risk mitigation programmes. We are also in the process of closing out our follow up engagement on the thematic review of UCITS performance fees and we continue to engage with funds on areas of concern arising in our review of closet indexing.
We are also scoping a review of how firms have implemented the measures introduced under the CP86 Fund Management Companies Guidance. This work will aim to identify standards of industry compliance in order to inform our supervisory approach and ensure that the required systems of governance are in place to protect investors’ best interests. As well as our normal thematic tools such as questionnaires, desk-based reviews and on-site inspections, our CP86 review will be informed by the knowledge we have gained through our engagement at a European level, our experience in assessing applications for authorisation received due to Brexit and our ongoing supervisory experiences with the funds that we regulate.
Through this work, and our supervision of securities markets generally, we want to see securities markets (including funds) that:
- Provide a high level of protection for investors and market participants.
- Are transparent as to the features of products and their market price.
- Are well governed (and comprise firms that are well governed).
- Are trusted, by both those using the market to raise funds and those seeking to invest.
- Are resilient enough to continue to operate their core functions in stressed conditions and to innovate appropriately as market evolve.
Indeed, if one is looking for a context within which to discuss diversity and inclusion in funds, one need look no further than the principles of CP86 itself. As you will know, CP86 was driven by concerns to ensure that our framework for protecting investors remained fit for purpose, particularly as the funds industry grows in nature, scale and complexity. CP86 makes clear that running a fund management company requires that adequate resources are dedicated and organised to ensure that investors’ best interests are protected by good governance and sound decision-making.
Diversity within management bodies has an important role to play in ensuring such good governance and sound decision-making. I have remarked on a previous occasion1 that if we are to ensure the lessons of the crisis are learned in a way that endures, compliance efforts must be underpinned by an equally systematic approach to ensuring that a culture prevails within firms that supports the objectives financial services regulations seek to achieve. Amongst other things, this involves taking a careful look at how decisions affecting users of financial services are actually made within firms and who is making them, and that should include considering the boards and other decision-making forums are sufficiently diverse and inclusive to protect investors’ best interests.
Diversity & Inclusion’s contribution to good governance
The OECD summed the point up admirably when it said:
“Diversity of thought, experience, knowledge, understanding, perspective and age means that a board is more capable of seeing and understanding risks and coming up with robust solutions to address them. It is about the fundamental principles of good governance.”2
Moreover, the evidence indicates that diversity and inclusion are also good for the bottom line (which itself serves investors of course in the form of the return on their investment). To quote an example from a speech by my colleague Michael Hodson3, IMF research4 shows that adding one more female to a firm’s senior management or board of directors, while keeping the size of the board unchanged, is associated with an 8-13 basis point higher return on assets.
Of course gender is only one of many dimensions of diversity. In its broadest sense diversity can be defined as “any attribute which may lead people to the perception that [a] person is different from me”5. Diversity has also been described as the “art of thinking independently together”6. To put it yet another way: “Thought diversity allows for differing perspectives on ideas and unique insights into problems. It creates opportunities for innovation, entrepreneurship, and partnerships in unexpected places. It allows you to take a ‘reality check’ before plunging into new activities. Most important, it helps you avoid groupthink.”7
In a financial services context, group think (the lack of challenge and independent thought) reduces the capacity of a firm to identify and anticipate negative outcomes for the firm and its customers or investors. Indeed it was Andrew Haldane, as Chief Economist at the Bank of England, who said it was a lack of intellectual diversity at the helm of financial institutions that both sowed the seeds for the 2008 financial crisis and contributed to its depth and severity.8
What can Funds do?
Organisations therefore have to recognise that embracing Diversity & Inclusion is key to having an effectively functioning Board that will challenge itself appropriately when required to. Boards should also consider issues that may have been overlooked previously and debate alternative solutions. This can include adapting hiring criteria and widening candidate search criteria to include non-traditional professional experience.
In a funds context, the role and importance of independence of thought and challenge is especially pertinent when you consider the scale of outsourcing by funds and their reliance on service providers. We have recently reiterated our expectations in this regard – in her remarks to the Central Bank’s recent Outsourcing Conference9, Derville Rowland, Director General, Financial Conduct referenced the unsatisfactory level of board awareness of outsourcing risk as one of the particularly disappointing conclusions of the Central Bank’s review of outsourcing activity, and noted that ultimate accountability for compliance remains with regulated firms, particularly the boards of those firms.
The challenge for a given board lies of course in getting the mix and balance of diversity correct and appropriate for the nature, scale and complexity of the organisation in question. By definition, one size does not fit all when it comes to Diversity & Inclusion. Nevertheless, the Central Bank will look with increasing scrutiny to see that boards are challenging themselves to ensure the level of Diversity & Inclusion necessary for sound decision making to protect investors’ best interests.
Diversity & Inclusion in the Central Bank
I mentioned the commendable manner in which the IFDA is leading by example through its work on Diversity & Inclusion.
At the Central Bank of Ireland, we are also seeking to practice what we preach. We see Diversity & Inclusion as vital to ensuring we have the right mix of people to deliver our complex and diverse mandate and that all our people have the chance to reach their potential.10 The importance that the Central Bank places on the topic is reflected in the work we have undertaken over recent years to create a diverse and inclusive environment within our own organisation and we are strongly committed to continuing our work in this area. In our Central Bank Strategic Plan 2019 – 202111 we call out Diversity & Inclusion as an essential part of what makes our workplace effective and fulfilling for our people and what will drive further improvements in the governance and risk management of regulated firms.
We recently published our 2019 Gender Pay Gap Report12, an initiative that is part of our commitment to both transparency and to becoming a more diverse and inclusive workplace. The report found that the gender pay profile at the Central Bank as at 1 January 2019 is 2.4% in favour of male employees, the gender pay gap has reduced by 0.3% since 1 January 2018 and gender distribution between male and female employees has moved from 50%:50% in 2018 to 49% female: 51% male in 2019. This report sits alongside a range of other initiatives the Central Bank has undertaken that are focused on creating a more diverse and inclusive workplace, including the establishment of a clear vision for Diversity & Inclusion, creation of employee-led networks, enhancement of flexible working practices including home working, membership of the 30% Club and becoming a signatory of the Diversity Charter Ireland. In all of these measures, we are acutely sensitive to the need for diversity of thought and perspectives at the Central Bank in order to avoid groupthink, better represent the wide values of the society we serve and enhance our performance.
Diversity and Inclusion in the context of the evolution of the Funds industry
So, turning to trends in the funds industry, are there reasons to be especially focused on Diversity & Inclusion in the funds industry at this particular point in time? I believe there are.
Notwithstanding the growth in the funds industry to which I referred earlier, the funds industry here and across the globe is facing powerful headwinds: rapidly evolving technology, increasing regulatory obligations and demands for higher returns at lower cost are all putting pressure on traditional business models. All of these factors mean the sector, perhaps now more than ever, needs to be in a position to attract, retain and harness the talent and contributions from the broadest possible range of staff to innovate and compete.
Bringing together individuals with a wide variety of life experience and perspectives naturally helps organisations to overcome the negative consequences of groupthink and unconscious bias. At a fundamental level, this is helpful for exercises such as risk assessments, scenario analysis, spotting and understanding emerging trends, and both averting and managing crisis.
In 2017, the Central Bank published its data on the gender profile of senior roles being put through the Bank’s Fitness and Probity regime and March 2019 marked the third publication of such a report13. From a low base, in 2018 there was an increase in applications for female appointments across all sectors (from 22% to 24%), with the securities and markets sector showing an increase of 6%, which was encouraging to see.
However the Central Bank’s Fitness and Probity data showed that female applicants still account for only 25% of the total Individual Questionnaire applications submitted. Even looking at this one aspect of Diversity & Inclusion, gender, it illustrates the significant gap that must be bridged to address the lack of diversity at the highest level of management in the firms we regulate.
So, to conclude, why do we at the Central Bank see Diversity & Inclusion as being so important to the achievement of our mission in supervising funds? Well, let’s look at the evidence as I have just outlined it:
- The scale and complexity of the funds industry and its regulation is growing.
- The responsibilities of fund boards and the complexity of their work is therefore also growing.
- The quality of funds’ decision-making apparatus has to improve to meet this challenge.
- The evidence is there that Diversity & Inclusion is important to ensuring good decision making and risk management.
- The evidence is also there that the membership of the boards and senior executives of our regulated entities, including funds, is not as diverse as it should be.
Taking these points together, they present the classic components of the sort of industry-wide risk that would concern a regulator, and should also concern an industry.
This is why we are placing such an emphasis on this topic. It is also why we are so welcoming of initiatives such as those of the Irish Fund Directors Association to promote Diversity & Inclusion.
I hope these remarks have been helpful and I trust you will have a stimulating discussion of how greater diversity and a more inclusive culture can contribute to better governance and decision-making in the funds sector at this critical point in its evolution.
I would like to thank Antoinette McDermott and Stephanie Kearns for their assistance with these remarks.