The Financial Conduct Authority wants financial firms to set diversity and inclusion goals and report annually against these targets.
These proposals are contained in a new regulatory framework on diversity and inclusion (D&I) for the financial sector, which is being proposed jointly by the FCA and Prudential Regulation Authority (PRA).
Launching a consultation on its proposals the FCA said better diversity and inclusion practices would support healthy work cultures, reduce groupthink and unlock talent. It added this can also deliver better internal governance, improve decision making and risk management, while also helping firms better understand diverse consumer needs.
These new rules not only cover plans to boost diversity, they offer new guidance on how City workers can be struck off for failing to meet the regulator’s “fit and proper” test for non-financial misconduct offences. This follows a spate of high profile cases concerning sexual misconduct allegations in the City. The guidance within the proposals clarifies that bullying and sexual harassment can be a D&I issue and pose a risk to healthy firm culture.
The proposals set flexible minimum standards to raise the bar, placing more requirements on larger firms. The proposals include requirements to:
- Develop a diversity and inclusion strategy setting out how the firm will meet their objectives and goals.
- Collect, report and disclose data against certain characteristics.
- Set targets to address under-representation.
FCA Chief Executive Nikhil Rathi says:”For UK financial services to be competitive and for the companies in it to be well run with healthy work environments, it’s 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.”
The PRA chief executive Sam Woods adds: “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.”
Work led by the Government, as well as voluntary initiatives, have already made progress. This includes projects such as the Treasury’s Women in Finance Charter, as well as the Parker and FTSE Women Leaders Review. While diversity and inclusion is a broad issue for society, the FCA and PRA consider that there is a role for regulators to play where diversity and inclusion is relevant to their objectives.
The FCA and PRA have brought forward proposals today having received broad support for doing so in their 2021 Discussion Paper.
The FCA and PRA say flexibility remains at the heart of the proposals. Each firm is different, and they need to come up with their own solutions. Most of these requirements, including setting targets, regulatory reporting and disclosure, would only apply only to the largest firms.
The consultation is open until 18 December 2023. The regulators welcome comments on the proposed approach taken and the feedback will be used to develop final rules planned for publication in 2024.
Nelu Diversified Solutions CEO Uche Enemchukwu welcomed these proposals. “What would this mean for financial services? Industry investment in developing pipelines of diverse talent and expertise. In addition to measurable data and actionable policies, the investment will also require intentional and inclusive leadership — that not only makes ED&I a priority, but is also representative of the talent they wish to attract.”
Quilter chief risk office Priti Verma said that the proposals, as they stand, should help make the financial services industry more attractive to women. “This consultation sends a clear message that it is high time that diversity is taken seriously in financial services and that poor office behaviours can no longer be tolerated. The financial services sector needs to go much further to break down perceptions that it’s a ‘boys’ club’, as it is this that directly prevents women and girls viewing financial services as a potential career.”
She adds: “The regulator’s intervention is a timely reminder us all about how important diversity at the very top is in setting a healthy corporate culture, where people are free to speak. And that includes diversity in general – not just gender diversity.
“But protecting people’s rights and making them feel like they belong in a workplace should be just the bare minimum. Greater diversity should be part of company strategy and recognised as a non-financial risk. Getting it right can help improve both business performance and investment returns. More diversity on boards means more varied perspectives and experiences, which allows for more effective decisions to be made, and group think to be challenged.”