A: If your friend's appointment was vetoed because of his ethnic origin, then that would be a clear-cut breach of the Race Relations Act and he could sue in an employment tribunal.
From what you have told us, he would have quite a strong case. It's not in itself a breach of law to ask someone where they are from or to discuss ethnicity - but it's certainly very bad practice (unless it's directly relevant to the job - for example to ascertain language skills).
In this case, it's hard to see how the interviewer could justify his line of questioning and given that he subsequently vetoed the appointment, a tribunal would be likely to conclude that racial discrimination had taken place. Your friend's case would be further strengthened by the number of previous interviews, as they make it hard for the company to argue that he didn't have the required skills or attributes.
Although your friend does not want to sue, he (or indeed anyone else) can report this hedge fund to the Commission for Racial Equality (CRE) https://www.cre.gov.uk. This is the statutory body charged with monitoring race equality laws and its remit includes advising individuals who believe they have been discriminated against and investigating organisations "where there is evidence of possible discrimination."
If you have good reason to believe that an employer is being racist, it is right to do something about it. The CRE are the experts in this area and should definitely be your first port of call.
Next week's question: I am about to begin an equities graduate programme at a major European Investment Bank. I have been placed on the electronic trading/DMA/algorithmic trading sales team but have reservations about this area. I have always wanted a sales career in a market facing role but have been told many equity areas, particularly cash, are in decline. Do you think there is much growth in this area? Is it a good start for a sales career or is it still a middle-office function and something of a commodity/IT support Service? Will the role prepare me for other product areas? My firm tells me it's a hotshot area but I need impartial advice.
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