- FCA unveils proposals for diversity and inclusion (D&I) in the financial sector.
- Proposals aim to foster healthy cultures, combat groupthink, and tap into diverse talent.
- Consultation open until December 18th 2023, with planned implementation in 2025.
- Key aspects include NFM standards for all firms, plus additional D&I requirements for larger firms (>250 employees).
The UK Financial Conduct Authority (FCA) has recently unveiled a set of proposals aimed at promoting diversity and inclusion (D&I) within the financial services sector. These initiatives, intended to support healthy work cultures, reduce groupthink, and tap into a broader spectrum of talent, are now open for public consultation until December 18, 2023. A webinar scheduled for Monday October 30, 2023, offers an opportunity for interested parties to gain more insights into these proposals. The FCA plans to finalize and publish the rules in 2024, with implementation scheduled for a year later.
At the core of the FCA’s stance is the belief that diversity is essential for fostering robust organizational cultures, ultimately resulting in better outcomes for consumers and the financial markets. By placing D&I at the forefront, the FCA aims to address behavioural biases and groupthink that often emerge within homogenous environments.
The FCA has long championed the cause of enhanced diversity within the financial sector, especially at senior management levels of regulated firms. In July 2021, it, along with the Prudential Regulation Authority (PRA) and the Bank of England, released a discussion paper outlining D&I proposals. Since then, the regulators have issued numerous statements, reports, and speeches advocating for D&I initiatives.
Concurrently, the PRA also published a D&I consultation applicable to most firms authorized or designated by the PRA. While these initiatives were developed in parallel, there are some distinctions, particularly concerning senior manager responsibilities regarding D&I.
PRA Chief Executive Sam Woods said, “Diversity and inclusion play an important role in guarding against groupthink within firms. Firms in which a broad range of perspectives is welcomed and encouraged will manage their risks better, advancing the PRA’s objective of safety and soundness. Stronger diversity and inclusiveness should also make firms more competitive by enabling them to attract a wider pool of talent. We are tabling proposals today which we think will advance our objectives, alongside existing core parts of our regime such as capital and liquidity requirements, and we welcome views on them from all stakeholders.”
FCA Chief Executive Nikhil Rathi said, “For UK financial services to be competitive and for the companies in it to be well run with healthy work environments, its vital they attract, retain and promote the best talent. The data suggests this isn’t happening. Our proposals will encourage the largest firms to put in place plans and report against their delivery.
UK financial services has long been a magnet for best-in-class talent globally. Increasing levels of diversity within firms can help attract and unlock talent, supporting the sector’s international competitiveness.
We have taken a lead among regulators in taking a clear stance that non-financial misconduct, such as sexual harassment, is misconduct for regulatory purposes. We’re strengthening our expectations on how the firms we regulate consider such misconduct when deciding whether someone is fit and proper to work within the industry.”
FCA’s Desired Outcomes:
In this latest consultation, the FCA is putting forth rule-based proposals to formalize its position, accelerate the pace of D&I change, and support the Consumer Duty. These proposals emphasize that firms should consider the unique needs, characteristics, and objectives of their customers. Specific desired outcomes include promoting a healthy culture, mitigating groupthink, unlocking new talent, and ensuring firms are more attuned to and equipped to meet diverse and everchanging consumer needs.
Affected Firms:
The FCA is suggesting a minimum standard requirement related to non-financial misconduct (NFM) for all Financial Services and Markets Act-regulated firms with part 4A permission. Additional obligations are proposed for firms with 251 or more employees, encompassing data reporting, D&I strategies, data disclosure, target setting, and risk and governance standards. To determine firm size, the FCA will mandate relevant firms to report employee numbers annually on FCA’s RegData. These numbers will be based on an average over a rolling three-year period.
Non-Financial Misconduct:
The rules pertaining to NFM will be applicable to all relevant firms, irrespective of their size, covering issues such as bullying, harassment, and discrimination. These changes mark the first time that such rules will be incorporated into the FCA’s rules and guidance, signifying a potentially significant expansion of the FCA’s authority in assessing individuals’ “fit and proper” status and firms’ adherence to “threshold conditions” for authorization.
Additional requirements for larger firms
For firms with 251 or more employees, the FCA’s proposal mandates the development of an evidence-based D&I strategy, including objectives and progress measurement plans. These firms must also collect and report data on various demographic characteristics, such as average number of employees, age, religion, ethnicity, sex or gender, sexual orientation and disability or long-term health. Other characteristics such as gender identity, carer or parental responsibility, will be optional for now, but the FCA warns that over time it expects to see more firms reporting these and it is likely to become a requirement in the future. Large firms must also publicly disclose certain D&I data, set appropriate diversity targets, and treat D&I as a non-financial risk.
Conclusion
The FCA’s proposals represent a significant step towards promoting diversity and inclusion within the financial services sector. While some of these initiatives have been long-anticipated by firms, they now provide a structured framework for understanding regulatory expectations related to D&I. However, certain aspects, such as the expansion of NFM considerations, may have far-reaching implications, and the industry will need time to adapt to these changes.
Nonetheless, only 19% of executive positions in banking, capital markets and payments being held by women (Deloitte, 2023), and over 100 of the FTSE250 either have no ethnic minority representation on their boards or are unable or unwilling to provide data (Tyler, 2023). These figures show that there is a need for action by the UK regulator and these proposals offer the much-needed guidance to firms grappling with D&I issues that have traditionally been outside the regulatory purview.
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For the full FCA consultation paper visit – https://www.fca.org.uk/publications/consultation-papers/cp23-20-diversity-inclusion-financial-sector-working-together-drive-change
For the full PRA consultation paper visit – https://www.bankofengland.co.uk/prudential-regulation/publication/2023/september/diversity-and-inclusion-in-PRA-regulated-firms
Deloitte’s global report on Women leaders in Financial Service, 2023 – https://www2.deloitte.com/us/en/insights/industry/financial-services/gender-diversity-in-global-financial-services.html
David Tyler, The Parker Review, 2023 – https://parkerreview.co.uk/wp-content/uploads/2023/03/The-Parker-Review-March-2023.pdf