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FCA and PRA publish consultation papers on DE&I in the financial sector

15 Nov 2023

By Gaia Udage, Senior Compliance Consultant, and Amber Williams, Consultant

The UK’s Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) published separate consultation papers on diversity, equity and inclusion (DE&I) in the financial sector on 25 September 2023. In this article, we discuss the scope and key elements of the proposals put forward.

The two consultation papers build on ideas discussed in the regulators’ joint discussion paper on DE&I (DP21/2) published in July 2021, as well as the Senior Managers and Certification Regime (SMCR). The following statement in the FCA’s consultation paper by FCA Chief Executive Nikhil Rathi set the tone of the regulators’ approach:

“Greater diversity and inclusion can create better outcomes for consumers and markets by supporting healthy work cultures, reducing groupthink, unlocking talent and improving understanding of diverse consumer needs.”

Scope of the consultation papers

It should be noted that some proposals contained within the consultation papers apply to all firms, while others apply only to large firms (broadly defined as those with more than 250 employees). The proposals are wide-ranging and cover new rules and guidance on:

  • Non-financial misconduct (NFM)
  • DE&I strategies
  • Data disclosure and regulatory reporting
  • Target setting
  • Risk and controls and board governance

Non-Part 4A FSMA firms, such as credit rating agencies, payment services and e-money firms, will be outside the scope of the proposals. These firms are however encouraged to voluntarily adopt the DE&I framework.

Non-financial misconduct

NFM, such as bullying and discrimination, is applicable to all firms with a Part 4A permission under the Financial Services and Markets Act 2000 (FSMA), including MiFID investment firms, UCITS managers and AIFMs.

The FCA is clear that NFM erodes psychological safety and trust and can increase the risk of groupthink and the problems this gives rise to. Bullying and harassment can leave individuals feeling reluctant to speak up, which can result in firms missing the opportunity to remedy problems that may lead to regulatory breaches, reduced market integrity or consumer harm.

NFM rules will be integrated by the FCA in the following ways:

  • Expansion of the Code of Conduct rules to cover serious instances of bullying, harassment and similar behaviour towards employees and contractors
  • Provision of guidance regarding the types of behaviour that will be in scope and what conduct falls out of scope as it relates to an employee’s personal or private life
  • Clarity on how NFM will form part of ‘Fit and Proper’ assessments, including how bullying and similar misconduct within the workplace is relevant to fitness and propriety, even when it occurs in the person’s private life
  • Extension of guidance on suitability threshold conditions to include offences relating to a person’s demographic characteristics (e.g. sexually or racially motivated offences) and tribunal or court findings that the firm or its employees have been involved in discriminatory practices

DE&I strategies, data disclosure, target setting and governance

The following additional measures apply to FCA authorised firms with 250 or more employees (“large firms”) and to firms that are also regulated by the PRA.

The FCA proposes the following:

  • Firms must develop DE&I strategies containing information about a firm’s DE&I objectives, a plan for meeting goals, a summary of how obstacles will be identified and managed, a plan for measuring progress, and ways to ensure there is adequate awareness of a DE&I strategy among staff, such as training. The firm’s strategy must be easily accessible, e.g. on their website
  • Firms will be required to set targets to address underrepresentation and such targets will be publicly disclosed. There should be at least one target for the board, the senior leadership and the employee population as a whole. Firms are required to disclose the rationale for their chosen targets
  • Firms will need to annually collect and report data via a regulatory return. This data will include information on a range of demographic characteristics, inclusion metrics and targets. Mandatory demographic metrics include age, gender, disability/long-term health condition, ethnicity, religion and sexual orientation. Inclusion metrics include whether employees feel safe to speak up if they observe inappropriate behaviour or safe to express disagreement with the dominant opinion without fear of negative consequences
  • Firms will need to make public disclosures on DE&I data
  • Firms will receive guidance to make clear that matters relating to DE&I are to be considered as part of a firm’s governance structure as a non-financial risk

Next steps

Both consultation papers close for comments on 18 December 2023, with the intention of developing final regulatory requirements for publication in policy statements in 2024, to come into force in 2025.

If you need help assessing how the proposed rules might apply to your firm, please feel free to contact us or get in touch with your usual IQ-EQ consultant.

For information on IQ-EQ’s own DE&I efforts and wider ESG initiatives, please read our Sustainability Report.

Working with IQ-EQ has been seamless – you and your team understand our business, advise us appropriately, and handle your side of our collective partnership so that we can focus on making good investment decisions. Evan Gibson SVP, Merchants Capital

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