Balance makes for better business - Director General Derville Rowland

Address by Derville Rowland, Director General, Financial Conduct at the Women in ETFs International Women’s Day Event, Euronext, Dublin

Ladies and Gentlemen,

It is a real pleasure to be with you this morning, and I’d like to thank Women in ETFs and Euronext for inviting me here to mark International Women’s Day.

As many of you will know, International Women's Day traces its roots back to 1911 when the Suffragettes were campaigning for women’s right to vote.

We have come a long way since then. Here in Ireland, women have had the right to vote for more than a century. They have twice held the office of President, have occupied the office of Tánaiste on four occasions and have secured 19 seats at the cabinet table since the first Dáil met in 1919.

101 Years Since Irish Women Got the Vote

But the high visibility of those successful women tends to mask the fact that even today, women make up just 22 per cent of all TDs in the Dáil prompting former Tánaiste Frances Fitzgerald to describe our democracy as “completely unfinished business.’’¹

If women have unfinished business in politics, they also have unfinished business in the financial services sector.

So it is heartening when groups such as yours – men and women – come together to support and inspire women to further their careers in sectors where they may historically have been under-represented.

I am firmly of the view that you cannot be what you cannot see.

So I welcome Women in ETFs’ initiative to raise the visibility of women in your industry by setting up a Speakers Bureau to ensure a pipeline of women speakers is available to conference organisers.

I understand this initiative came about due to a concern that only four per cent of speakers were women at a global Exchange Traded Fund (ETF) conference just a few short years ago. Already, the number of women speaking at such conferences is substantially on the increase and I wish you every success in reaching your target of 25 per cent women speakers by next year.

While it is important to ensure the visibility of women in finance and to provide role models to empower other women, it is also important to highlight the evidence that diversity delivers better outcomes.

So I was again pleased to see that one of the aims of today’s bell-ringing ceremony at exchanges around the world is to highlight the business case for gender equality.

This chimes very much with the theme of International Women’s Day 2019 - #BalanceforBetter – which seeks to highlight that balance is not just a women's issue, it's a business and economic issue as well.

In my remarks this morning, I will highlight first of all why the Central Bank considers that balance, including gender balance, matters in the financial services sector.

Secondly, I will highlight the initiatives we are taking to rebalance the boards and leadership teams at the firms we regulate. I will also reference the initiatives the Central Bank of Ireland has taken to practice what we preach when it comes to diversity, including gender balance.

And last, but certainly not least, I want to impress upon you the importance the Central Bank attaches to ensuring that firms and markets conduct themselves in such a way as to ensure an appropriate balance between the interests of firms and their customers.

#Balanceforbetter: The Evidence

When the financial crisis erupted with the fall of Lehman Brothers more than a decade ago, some observers blamed the crash – at least in part - on a lack of diversity in the financial services sector.

The Managing Director of the International Monetary Fund (IMF), Christine Lagarde, is famously of the view that if it was Lehman Sisters rather than Lehman Brothers, the world might well look a lot different today.²

While it is difficult to establish the validity of a counterfactual argument, there is an emerging body of evidence, some more robust than others, that suggests gender balance matters. For example, an Australian study found that an increase in women’s representation on company boards was associated with a decreased probability of fraud and recommended their findings to policy makers interested in enhancing board governance and monitoring.³

Other research has found that management teams with an equal gender mix perform better than male-dominated and female-dominated teams in terms of sales, profits and earnings per share.⁴

And Lagarde herself recently drew attention to IMF research which found that the benefits from closing gender gaps are even larger than previously thought. The IMF’s evidence—from macroeconomic, sectoral, and firm-level data—shows that women and men complement each other in the production process, creating an additional benefit on growth from increasing women’s employment. In other words, adding more women to the labour force should bring larger economic gains than an equal increase in male workers.⁵ 

I like to think of it as a virtuous circle. Empowering women to believe in themselves is critical. But so too is the evidence that shows why diversity matters. And as that evidence is increasingly accepted, it will drive better outcomes that can only benefit us all.

The Central Bank has repeatedly stated that we consider a lack of diversity at senior management and board level to be a leading indicator of heightened behaviour and culture risks in financial institutions.

We want the firms we regulate to be sufficiently diverse and inclusive, particularly at senior level, to prevent group-think, guard against overconfidence, and promote internal challenge.

This is why when we examined the behaviour and culture of the five Irish retail banks last year, we also conducted diversity and inclusion assessments. Our analysis and inspection work showed that the banks were at an early stage of development in their approach to diversity and inclusion.

Following on from the Behaviour and Culture Report, we told each bank to submit a diversity and inclusion strategy supported by an implementation plan.⁶

New Central Bank Research – Diversity Improvements Welcome, More Progress Needed

Today, new Central Bank of Ireland research shows the percentage of applications for regulatory approval for women to senior roles in the financial services sector improved to 24 per cent in 2018. That compares with 22 per cent last year.⁷

For example, women now account for 31 per cent of applications in banking, 26 per cent in asset management and 25 per cent in securities and markets.

Despite this progress, it is striking that the data continues to show a pronounced gender imbalance at board level and in revenue generating roles.

So we will be keeping up the pressure.

Of course, diversity isn’t just about gender. Many of these appointees have similar backgrounds, education and experiences, suggesting there remains a lack of diversity in senior roles in the financial services sector.

As some of you may be aware, the Central Bank hosted a session with the Irish Funds Directors Association’s (IFDA) Diversity Committee last year. Our discussions centred around the importance of diversity on fund boards to foster sound decision-making, the work of the IFDA’s newly formed Diversity Committee and the Central Bank’s own diversity and inclusion work.

How Things were in 1937

The Central Bank is striving to lead by example when it comes to diversity and inclusion. It wasn’t always that way, of course, as I was reminded the other day when I read a letter sent by a former woman staff member to the Currency Commission – as the Central Bank was then called – back in 1937.

“Dear Sir,’’ she wrote. “Having been a woman assistant on the staff of the Currency Commission for over six years, and having resigned from that position only because of my impending marriage, I wish to apply for the wedding gratuity, if any, to which I may be entitled… I enclose a copy of our wedding certificate, which I should like to have returned at your earliest convenience.’’

Those were the days, when women were required to resign when they got married. The woman in question was claiming the gratuity of one month’s pay per year of service to which she was entitled if she had served more than six years (subject to a cap of 12 months’ pay).

Indeed, it wasn’t until 1973 that the marriage bar was lifted in Ireland. And it wasn’t until 2001 that the Central Bank appointed its first female Head of Division.

But I am happy to report that we have made very substantial progress since then. Today women make up almost 50 per cent of our total workforce, one third of our board, nearly 40 per cent of our executive committee and over 40 per cent of our leadership team.
We have led by example by publishing our Gender Pay Gap Report on our website, though we are not legally required to do so.⁸ Our gender pay gap stood at 2.7 per cent in favour of men at 1 January 2018.

While this figure is well below the national and European averages of 13.9 and 16.3 per cent respectively, we have more to do and we are committed to doing it.
And to emphasise, it isn’t just about gender. We want a workplace that is genuinely diverse and inclusive.

The Central Bank Celebrates Diversity

In 2017, Governor Philip Lane launched the Rainbow Network, an employee network to support LGBTQ colleagues, while in 2018 the Central Bank flew the Pride Flag outside its main building and participated in the Dublin Pride Parade.

We also participate in programmes to promote access to the labour market for graduates with disabilities; scholarships for school leavers who need to earn while they are studying; and programmes to get young inner city adults work-ready.

The Central Bank has focused on diversity and inclusion over the last number of years because we recognise the many important outcomes that a diverse and inclusive workplace can bring. These include attracting and retaining a wider talent pool, a reduction in groupthink and increased levels of challenge - to name but a few.

Furthermore, we are aware of our responsibilities as a large public service organisation, and indeed of the need to hold ourselves to the standards we expect of regulated firms. In short, we believe that creating a more diverse and inclusive workplace is both the right thing to do and the smart thing to do.

A Properly Balanced and Effectively Regulated Securities Market

Recognising the impact of financial misconduct scandals on consumers, investors and markets, global regulators have in recent years placed greater emphasis on the conduct and culture of the firms we regulate and supervise. In the Central Bank’s case, we established a new Pillar dedicated to financial conduct regulation in 2017.

Our mission is to regulate financial conduct with the aim of ensuring that the best interests of consumers and investors are protected and that markets operate in a fair, orderly and transparent manner. Our vision is for a trustworthy financial system supporting the wider economy, where firms and individuals adhere to a culture of fairness and high standards.

It has been a hallmark of misconduct scandals globally that firms sometimes take advantage of the power imbalance between them and their customers.

Indeed, a recent report by a Royal Commission in to misconduct at financial services providers in Australia - including the “fees for no service ‘’ issue - noted that “there was a marked imbalance of power and knowledge between those providing the product or service and those acquiring it.’’⁹

The Central Bank of Ireland does not wish to see markets or products that put the interests of providers ahead of the interests of customers. We expect to see a properly balanced and effectively regulated securities market which:

• provides a high level of protection for investors and market participants;
• is transparent as to the features of products and their market price;
• is well governed (and comprises firms that are well governed);
• is trusted, by both those using the market to raise funds and those seeking to invest; and
• is resilient enough to continue to operate its core functions in stressed conditions and to innovate appropriately as markets evolve.

One of the ways for boards and senior executives to mitigate against conduct risk is to drive an effective culture at the firms they lead. We expect firms to be able to demonstrate, with clear examples, how their actions and communications are encouraging a culture of consumer and investor protection throughout the firm.

Conduct Regulation in the Funds Sector

Many of you here today work in the funds industry and with Exchange Traded Funds in particular.

Given the growth in ETFs globally with Assets Under Management (AUM) estimated at $4.9 trillion and given that Ireland is the largest domicile for ETFs in Europe with AUM of €399 billion at end of 2018, this is an area of strategic importance for the Central Bank. As a global hub for ETFs, the Central Bank is mindful of the European and global reach of Ireland’s investment funds sector and ETFs in particular. We take this responsibility very seriously.

The Central Bank is working to expand our understanding of the advantages and potential risks associated with ETFs - including liquidity risks during periods of market stress as well as concentration and interconnectedness risks. That is why, in addition to our domestic initiatives, the Central Bank is actively seeking global regulatory consistency in relation to ETFs through the International Organisation of Securities Commissions (IOSCO).

IOSCO is currently focusing on ETFs from both an investor protection and market structure perspective. The Central Bank is working with the US Securities and Exchange Commission as a co-lead on the market structural workstream.

As part of that work, IOSCO and the Financial Stability Board (FSB) will hold a joint workshop on ETFs and market liquidity in Washington this year. This will provide an opportunity for regulatory authorities and market participants to better understand the advantages and potential risks of ETFs.

Moving away from ETFs, crucial to achieving our overarching mandate – to safeguard stability and protect consumers – is ensuring the effective supervision of Ireland’s global funds industry.

In this regard, you will be aware that the Central Bank published details of our review of UCITS performance fees last year.

On foot of this review, we have required all UCITS fund management companies, which charge performance fees, to review their existing methodologies and report back to us. We will continue our supervisory engagement with the relevant providers until we are satisfied that the issues we have identified regarding performance fees have been resolved.

Last year also, we began a review of all Irish domiciled UCITS funds that report to be actively managed to determine if they are potentially index tracking – an activity known as “closet indexing.’’ The risk to investors is that the fund manager may be charging for pursuing an active strategy while in fact implementing a passive strategy. We are analysing over 2,000 funds that say they are actively managed and are following up with funds where indications of ‘closet indexing’ are found.

The Central Bank and the European Supervisory and Markets Authority (ESMA) want to ensure that investors are not misled about the investment objectives, policies and charges set out in fund documentation. We are firmly of the view that customers should only be paying for services that are actually being delivered. Where we identify potential closet indexing, we will be following up using our full suite of supervisory powers.

Wholesale Conduct

By comparison to retail financial services, wholesale financial markets encompass complex interconnected markets, a wide range of financial products and a large and varied group of professional market participants.

Due to the increase in the scale and sophistication of wholesale financial market activity carried out in and from Ireland, the Central Bank is stepping up its supervision of market conduct risk. We have set up a specialised Wholesale Market Conduct Team to carry out market conduct risk assessments of firms engaging - or applying to engage - in wholesale market activity.

We will shortly be writing to firms setting out our expectations of how they identify, mitigate and manage market conduct risk. And we will be asking the firms to provide a copy of our letter to their boards at the next meeting and for the resulting discussions to be reflected in the minutes of that board meeting.

Conclusion

In conclusion, I would like to thank you for inviting me here today to make the business case for gender equality, to set out the Central Bank of Ireland’s views on diversity, including gender diversity, and to articulate our vision for a trustworthy financial system that provides a better balance between firms and their customers. If I could leave you with one thought on International Women’s Day it would be this: balance makes for better business.

Thank you.

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Acknowledgements: I would like to thank Kathleen Barrington, Stephanie Kearns, Antoinette McDermott, Evin O’Reilly and James O’Sullivan for their help with this speech.

1 Madam Politician. The Women at the Table of Irish Political Power, by Martina Fitzgerald

2 https://blogs.imf.org/2018/09/05/ten-years-after-lehman-lessons-learned-and-challenges-ahead/#more-24394

3 https://journals.sagepub.com/

4 Hoogendoorn, S., Oosterbeek, H., van Praag, M., 2013. The impact of gender diversity on the performance of business teams: evidence from a field experiment Manag. Sci. 59, 1514–1528.

5 https://blogs.imf.org/2018/11/28/economic-gains-from-gender-inclusion-even-greater-than-you-thought/

6 https://www.centralbank.ie/docs/default-source/publications/corporate-reports/behaviour-and-culture-of-the-irish-retail-banks.pdf?sfvrsn=2

7 https://centralbank.ie/news/article/small-improvements-in-the-levels-of-diversity03Mar19

8 https://www.centralbank.ie/docs/default-source/careers/policies/gender-pay-gap-report-2018.pdf

9 Final Report, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.