Tara Swaminathan & Sarah Drew in our Financial Services Regulation team look at what the anticipated regulatory D&I requirements may look like and what you can do to prepare.
UPDATED 18 October 2023
Following DP21/2, the FCA has now published a consultation paper on Diversity & Inclusion (D&I) in the Financial Sector. The consultation opened on 25th September 2023 and is due to close on 18th December 2023. The paper emphasises that the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), consider D&I to be a regulatory issue and that evidentially, the sector is not where it should be. The expectation is for firms to foster healthy cultures where all staff feel able to contribute and where constructive feedback is encouraged.
To achieve this, plans are being put in place to:
For those firms not required to provide reports, there will be opportunities to submit a voluntary report, all of which will highlight where change is needed and allow the regulators to better target their interventions.
The plan is to bring new rules in this area into force within 12 months following the publication of the Policy Statement. We would anticipate that new rules will be in force by Q3/Q4 2025.
The consultation paper is a reminder to firms that whilst it may be some time before the rules are in place, firms should start taking affirmative action to implement and accelerate meaningful D&I changes to its culture and practices. D&I lies at the core of a firm’s culture, it should not be considered a side-issue or a tick-box requirement.
23 August 2023
The FCA is due to consult on proposals that were originally set out in its discussion paper on ‘Diversity and inclusion in the financial sector – working together to drive change, (DP21/2)’.
The aim of the discussion paper was to have a conversation around how the FCA can “accelerate the pace of meaningful change” on diversity and inclusion (D&I, also referred to as Diversity, Equity and Inclusion (DEI)), in the financial services sector. Here, we look at what the anticipated regulatory D&I requirements may look like and what firms can do to prepare.
In short, yes. Financial services firms, especially regulated ones, need to be aware of the FCA’s agenda concerning D&I.
Its broader aims are to have a financial system in place, that is better able to support the economy via well-run firms, supported by sound financial markets that are designed to meet the diverse needs of consumers. It also wants to see a more “resilient financial services sector”. D&I forms part of this wider objective and we expect to see additional rules in place, once the consultation has taken place.
Recent statements on D&I from the regulator are in line with the FCA’s views on Environment, Social and Governance (ESG) and the new principle 12 (Consumer Duty). Specifically for D&I, the FCA expects firms to represent the society they seek to serve, with a more diverse and inclusive financial services industry helping to reduce ‘groupthink’, encourage debate and innovation, which in turn should improve outcomes for consumers and markets.
We expect it will want to see regulated firms engaging in meaningful discussions to bring changes to culture and a positive promotion of D&I in the workplace (something that has lacked pace and urgency to date). It’s also not a case of sitting back and waiting for the new rules to be published. Like with Consumer Duty and ESG, once they are published, we expect that firms will need to show that these processes are in place pretty quickly.
As an example of this, in April 2023, the FCA issued Policy Statement PS22/3, which set out changes to the Listing Rules and a focus on the implementation of D&I at board and executive committee levels. Whilst the rules have a specific application to senior members of staff in firms subject to the Listing Rules, they indicate a clear shift in the FCA’s direction of travel in relation to D&I.
The message from PS22/3 and DP21/2, is clear: regulators will not sit back and watch inequalities and a lack of inclusion continue to play out in the financial services sector. It has an obligation to act under the Public Sector Equality Duty, which brings D&I to the forefront for all regulated firms.
We anticipate that unlike PS22/3, any new rules will apply to all regulated firms. This includes those caught by non-Financial Services and Markets Act 2000 (FSMA) regimes (such as the Payment Services Regulations (PSR), Electronic Money Regulations (EMR) or Money Laundering and Terrorist Financing Regulations (MLR)) and firms regulated by one or more regulators.
The FCA does not plan to prescribe a ‘one size fits all’ approach but does believe that policy is essential as a driver for change.
Below are 3 key areas to assist your preparation in the implementation of a D&I strategy:
The discussion paper’s proposals around data are nothing new to regulated firms. DP21/2 discusses data collection as a way of assisting the regulator in its assessment of compliance. The expectation is that firms will develop their own metrics to enable the monitoring of D&I initiatives within their organisations.
It’s likely that the FCA would expect a firm’s metrics to be proportionate, to identify areas for intervention and to set out appropriate targets, with at least an annual collection of data.
We also anticipate prescribed rules in relation to the collection of data to feed into future regulatory reporting requirements (see para 4.21 of the Discussion Paper on the types of data-collection that may take place).
The discussion paper also proposes plans for firms to demonstrate their “diversity of thought”.
Here, it will be for firms to recognise (and therefore embed into their cultures) that different perspectives, skills, abilities, attitudes and knowledge of an individual worker, all help inform the approach to solving problems.
Diversity alone, however, will not be considered as enough. The FCA states that it’s important to be inclusive, with a “culture of psychological safety” being important for fostering inclusion.
Firms will need to demonstrate that all individuals in a firm are able to participate fully and able to speak freely without fear.
Issues regarding intersectionality may also be covered, in that one individual may have more than one area of social categorisation that they identify with.
Here, firms will need to take a holistic approach, rather than having initiatives focusing on single or specific characteristics. For example, it would not be sufficient for a firm to say it has satisfied the implementation of D&I into its firm, if its focus is purely gender, where other remaining characteristics of individuals within its organisation have then not been considered.
The FCA considers that D&I is an important aspect of a firm’s culture, and accelerating growth in this area is integral for the smooth-running of a firm’s internal processes, systems, controls and people.
DP21/2 is extensive with lots of points to discuss, but here’s a few further key areas to highlight:
The FCA has suggested that firms could use the following strategies (strategies the FCA deploys internally) to ensure compliance with the expected changes:
Nikhil Rathi (FCA CEO) recently gave insight into the FCA’s expectations on D&I when asking the banking industry the following question:
“Is your management team diverse enough to provide adequate challenge and do you create the right environment in which people of all backgrounds can speak up?”
Whilst at present there isn’t a definitive D&I strategy as such, we are likely to see a much more ‘joined-up’ approach to regulation in this area with steps being taken to bring all firms up to speed, and a more prescribed set of requirements likely to be implemented.
The FCA does recognise that there has been demonstrable good practice by firms but that – as a whole – the financial services sector has a long way to go.
In a sense, the latest messages on D&I and the FCA’s positioning isn’t new to the sector, but what we’re anticipating is that once the new rules are in force, the FCA’s expectation on firms will be to make sure that D&I strategies and processes are put in place promptly.
The FCA had planned to publish a consultation paper in response to DP21/2, in Q1 2022. It’s unclear why the schedule has slipped, but PS22/3 and more recent commentary from the regulator indicates that new rules are on their way.
Our lawyers are experts in financial services regulation. If you need support or advice on how to prepare for these proposed changes or any other aspect of financial services regulation, then please get in touch with the team.