UK’s financial regulators consult on new diversity and inclusion rules

The Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) have both launched consultation papers on a new regulatory framework for diversity and inclusion (D&I) in the financial sector (CP 23/20 and CP 18/23 respectively).

These proposals follow the regulators’ joint discussion paper on the subject from July 2021 (DP 21/2). They report that DP 21/2 was positively received, with broad support for regulatory action on D&I matters.

While there are differences between the FCA and PRA proposals, reflecting the differing aims and perimeters of the two regulators, they share a focus on using D&I to improve firms’ culture and decision-making. The regulators share a recognition that "groupthink" is liable to increase risk through lack of challenge. By contrast, a diverse talent pool where individuals feel included and thus able to speak up, may lead to the airing of different perspectives and ultimately to better decision making.

There is recognition in the consultation papers that a "one size fits all" approach is unlikely to be helpful, but that clarified that expectations around D&I will be beneficial. The proposals therefore include minimum standards, with requirements that firms will collect and report D&I data. Firms will need to have D&I strategies in place, but they will design these themselves to best fit their own organisations and will set their own targets tailored to their particular circumstances. The rules are likely to be tiered: some will apply to all firms and others, for example the requirement to establish and maintain an evidence-based D&I strategy, will apply only to larger firms with over 250 employees.

In addition to making D&I strategies and metrics compulsory, the regulators intend better to integrate non-financial misconduct standards into fitness and propriety tests. For example, the FCA proposes changes to its Handbook to reflect its stated view that non-financial misconduct is not an additional principal, it is simply misconduct. Greater clarity in this area will be welcomed, but this seems like a step in the right direction. Firms have had long-running issues grappling with complex questions of the relevance of non-financial misconduct, especially where the conduct takes place outside of the work environment.

Overall, the regulators make welcome suggestions as to how D&I may be improved in the finance sector. The consultations are open until 18 December 2023. Final rules are expected to be published in 2024 to come into force a year later. To the extent they have not already, larger firms will need to start thinking about how the data required under the new rules will be collated and also how to manage the inevitable associated privacy issues.