On September 25, 2023, the UK Financial Conduct Authority (“FCA”) published Consultation Paper 23/20 (“CP23/20”) to seek input regarding its intentions to establish a fresh regulatory framework for Diversity and Inclusion (“D&I”) within the financial sector. The recommendations presented in CP23/20 have been collaboratively developed with the Prudential Regulatory Authority (“PRA”), which concurrently issued its own consultation paper on the subject alongside the FCA’s CP23/20, specifically addressing firms regulated by the PRA.

The proposals presented in CP23/20 expand upon the concepts explored in the collaborative Discussion Paper (“DP”) 21/2 titled “Diversity and Inclusion in the Financial Sector – working together to drive change.” DP 21/2 was also jointly published by the FCA, PRA, and the Bank of England (“the Bank”) in July 2021.

This article provides a summary of the key takeaways.

What is the purpose of CP23/20?

The FCA recognises that there is still much work to be done, and it understands that fostering diversity and inclusion within firms can lead to improved outcomes for both the firms and consumers. These proposals aim to introduce a new regulatory framework on D&I to bolster diversity and inclusion in the financial services sector. It is acknowledged diversity per se is unlikely to be sufficient. Hence the focus on inclusion, ensuring firms are also fostering inclusive and healthy workplaces where employees feel safe to contribute, speak-up, challenge and raise concerns. The FCA would like to achieve the following outcomes with a D&I regulatory framework:

  • healthier firm cultures driven by improved conduct standards. Firms with inclusive culture and psychologically safe will support and allow diversity of thought to flourish;
  • minimised groupthink resulting in improved decision-making, risk management, and more effective challenges;
  • tapping into new talent by attracting, retaining, and developing individuals from underrepresented backgrounds, while also making the UK financial sector more appealing for work and business; and
  • enhanced recognition and addressing of diverse consumer needs: fostering increased competition in innovating products and services tailored to a diverse consumer base.

Who are these proposals aimed at?

CP23/20 is relevant to all firms holding Part 4A FSMA permission. Nevertheless, not all firms will be subject to identical requirements or have to fulfil them in the same manner. The specific application varies based on factors such as the number of employees (with firms employing over 251 people facing more extensive requirements), their categorisation under the Senior Managers and Certification Regime (“SMCR”), and whether they are subject to dual regulation or not. Additionally, this consultation may be of interest to other stakeholders, including:

  • regulated firms who do not have Part 4A permission;
  • industry groups/trade bodies;
  • consumer groups and individual consumers;
  • policy makers and other regulatory bodies;
  • industry experts and commentators; and
  • academics and think-tanks.

 

What is the FCA proposing?

For firms of any size:

The FCA is contemplating minimum standards, connecting D&I shortcomings to non-financial misconduct within:

  1. The Conduct Rules
  2. Fit and Proper assessments
  3. Suitability guidance on the Threshold Conditions

This linkage is important because it can undermine psychological safety and trust, raise the likelihood of groupthink and its associated problems. It may also discourage employees from voicing concerns, resulting in missed opportunities to address issues, which, in turn, could lead to regulatory breaches, harm market integrity, and negatively impact consumers.

Each firm will determine its own targets. In summary, non-financial misconduct (“NFM”) integration into staff assessments, acknowledging D&I gaps as a risk, is proposed.

For large firms (>251 employees)

Reporting and disclosure requirements for firms with over 251 employees will enhance monitoring by the FCA and the firms themselves.

  1. Establish and maintain a D&I strategy containing:
  • the firm’s D&I objectives and goals;
  • a plan for meeting those objectives and goals and measuring progress;
  • a summary of the arrangements in place to identify and manage any obstacle to meeting the objectives and goals; and
  • strategies to ensure adequate knowledge of the D&I strategy among staff.
  1. Data Reporting:
  • each year, submit numerical data to regulatory authorities, encompassing various demographic characteristics, inclusion metrics, and targets, using a regulatory submission;
  • in the initial year of implementing these requirements, report data to the best extent possible, and provide explanations for any gaps, along with plans for closing them; and
  • submit data to the FCA and PRA using a single data return.
  1. Disclosure:
  • propose that firms publicly disclose D&I data to enhance transparency, scrutiny, and enable comparisons of D&I performance among firms.
  1. Risk & Governance:
  • introduce fresh guidance for large firms, emphasizing that D&I matters should be regarded as a non-financial risk and managed accordingly within the firm’s governance framework.

 

What metrics or methods will be used to gauge progress in D&I outcomes?

  • Healthier cultures: Providing clearer guidance on non-financial misconduct and discriminatory practices would result in more reported disciplinary incidents to the FCA.
  • Reduced groupthink: Enhanced staff inclusion scores on the proposed D&I regulatory return, potentially assessed through the FCA’s proactive supervisory engagement.
  • Unleashing new talent: Elevating diversity within the board, senior management, and across regulated firms’ employee base.
  • Enhanced awareness of and catering to diverse consumer needs: Improved consumer feedback and increased rates of financial inclusion, leading to better-tailored products and services.

What are the FCA’s statutory objectives outlined in this proposed D&I framework?

  • Ensuring consumers receive adequate protection.
  • Safeguarding and enhancing the integrity of the UK financial system.
  • Promoting effective competition in the consumers’ best interests.
  • Supporting the medium to long-term growth and international competitiveness of the UK economy.

 When will happen next?

Interested parties have until 18 December 2023 to submit the responses to CP23/20.

The FCA intends to release its definitive draft guidance and policy statement (PS) in 2024. The forthcoming regulations will come into effect one year after the PS is published. This timeframe will allow firms to enhance their current policies where relevant or to create and implement new procedures for policy development, governance, oversight, and data collection.

Need help?

C&G Regulatory Solutions consultants have extensive experience in conduct matters, workforce planning and talent acquisition having worked at some of the UK’s leading brokerages at senior levels. Consequently, we are exceptionally well-suited to guide firms through the complexities of emerging regulatory requirements and to assist firms in identifying talent for the purpose of adhering to new regulations. For more information about how we could help, please do not hesitate to contact us.

References:

  1. CP23/20: Diversity & Inclusion in the financial sector – working together to drive change. Financial Conduct Authority. Available at: CP23/20: Diversity and inclusion in the financial sector – working together to drive change (fca.org.uk) (last accessed 29th September 2023).
  1. DP21/2: Diversity & Inclusion in the financial sector – working together to drive change. Financial Conduct Authority. Available at: DP21/2: Diversity and inclusion in the financial sector – working together to drive change (fca.org.uk) (last accessed 29th September 2023).