The UK Financial Conduct Authority (‘the FCA‘) and the Prudential Regulation Authority (‘the PRA‘) are both currently consulting on proposals to introduce a new regulatory framework on diversity and inclusion in the financial services sector. The FCA and the PRA have worked closely together to develop a consistent and coordinated set of proposals for consultation and both consultation periods close on 18 December 2023. Therefore, there is still time to have your say.

The consultation papers can be accessed for the FCA here and for the PRA here.

To give feedback on the proposals to the FCA you can do so here and/or email the PRA direct here.

Why are the FCA/PRA proposing a new regulatory framework?

The proposals are part of the FCA and PRA’s commitment and strategy to improve customer outcomes for consumers and markets by reducing groupthink, supporting healthy work cultures, unlocking diverse talent and improving understanding of, and provision for, diverse consumer needs.

The aim of these proposals is to better integrate non-financial misconduct considerations into staff fitness and propriety assessments, Conduct Rules and the suitability criteria for firms to operate in the financial services sector.

The outcomes of the FCA’s most recent Financial Lives survey showed that many consumers in minority groups face unequal outcomes and barriers to access financial services. The wider thinking behind these proposals by the FCA and the PRA are that improving internal diversity and inclusion will in turn improve an understanding of diverse customer needs.

Who are these proposals for?

Firms who have permission under Part 4A of the Financial Services and Markets Act 2000 (‘Part 4A Permission‘) will be interested in these consultations as they will be in-scope for these proposals applying to them.

However, these consultations may also be of interest to other stakeholders including regulated firms who do not have a Part 4A Permission, industry groups and/or trade bodies, consumer groups and individual consumers, policy makers and other regulatory bodies.

The FCA has confirmed that the proposals only apply to firms with Part 4A Permission who carry out activities in the UK.

It is worth pointing out that you do not need to have a Part 4A Permission to respond to the consultations – anyone can answer the questions to the consultation papers and respond to the regulators.

What are the proposals and are all FCA/PRA firms proposed to be caught by the proposals?

The proposals are sweeping and apply differently depending on the size of the firm.

However, the FCA and the PRA propose to establish a minimum standard for Part 4A Permission firms regardless of size and then depending on how many employees those firms have will depend on the level of additional requirements they will need to meet.

The proposals for the minimum standard, which will apply to all firms with Part 4A Permission, affect the following policy areas:

• Non-financial misconduct: The proposals look to explicitly include non-financial misconduct such as bullying and harassment within the following:
  • Conduct Rules: to expand the scope of COCON so that it covers serious instances of bullying, harassment and similar behaviour towards fellow employees.
  • Fit and Proper assessments: to explain that bullying and similar misconduct within the workplace is relevant to fitness and propriety and that similar behaviour in their personal or private life is also relevant.
  • Suitability guidance on the Threshold Conditions: To extend the current guidance to include, for example, offences relating to a person or group’s demographic characteristics (such as sexual or racially motivated offences).
• Data Reporting: All firms (except Limited Scope Senior Manager and Certification Regime firms) need to report the number of their employees annually.

On top of these minimum standards, firms with 251 or more employees (or dual-regulated Capital Requirement Regulation and Solvency II firms of any size), these additional requirements are also proposed:

• D&I strategies: Firms will be required to develop D&I strategies including, as a minimum, the following:
• • 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 obstacles to meeting the objectives and goals
  • Ways to ensure adequate knowledge of the D&I strategy among staff.
• Targets: Determine and set appropriate diversity targets. The FCA has confirmed that it does not propose to set sector-wide targets and firms remain free to determine their own targets consistent with their needs.
• Data Reporting: Gather, report and disclose particular D&I data.
• Risk & Governance: Take action to recognise a lack of D&I as a non-financial risk across the organisation.

Comment

“Diversity and inclusion isn’t a ‘hot’ topic or a buzz phrase, it is here to stay and something that all employers should embrace and recognise. With better diversity of thought and talent, there is more opportunity for growth, innovation and insight.”

– Kendel Shepherd, Senior Associate, Employment & Immigration

What action do I need to take now?

There is still time to provide your views on the consultation papers. There is one month to go and responses to the consultation papers can be submitted until 18 December 2023.

The consultation papers can be accessed for the FCA here and for the PRA here.

To give feedback on the proposals to the FCA you can do so here and/or email the PRA direct here.

What happens next?

The FCA and the PRA will review all feedback received and develop final regulatory requirements. A Policy Statement for the FCA and the PRA will then be published which is due some time in 2024. At present, it is planned that the implementation date for any changes will then be 12 months after publication of the relevant Policy Statement to give firms time to prepare for the introduction of the requirements.

We will analyse the impact of the new rules once the Policy Statement is published.

How we can support you

We acknowledge there is a lot to take on board in the proposals and that previously diversity and inclusion strategies and targets have not been a ‘regulated’ activity. Whilst we see this as a positive step by the FCA and the PRA, it can feel quite daunting having to comply with further regulations. If you and your firm are affected by these proposals, we recommend you consider conducting a gap analysis against the proposals now to understand the extent the rules may apply and what the expectations will be if the proposals are adopted into a Policy Statement. In conducting the analysis now, you will be ahead of any Policy Statement and it will also illustrate your proactiveness in the strategy.

We recommend reviewing existing diversity and inclusion policies and practices along with the data you have readily available from employee equal opportunities monitoring. By collecting the information now, it will allow you to understand your current status and begin to set priorities.

The Employment & Immigration and Regulatory & Compliance teams at Walker Morris are a multi-disciplinary group of specialist lawyers experienced in all aspects of employment related issues in the financial services sector.

Please contact Kendel Shepherd or Hasan Siddique for further information regarding the FCA’s and PRA’s proposals.