In a joint consultation, published September 25, the FCA and PRA have set out their proposals to enhance the safety and soundness of financial services firms and improve understanding of diverse consumer needs. 

The objective is to increase diversity and inclusion (D&I) in regulated financial services firms so they can deliver better internal governance, decision making and risk management. This supports healthy work cultures, reduces groupthink, unlocks talent and ultimately delivers better outcomes for markets and consumers.

Sam Woods, Chief Executive, PRA said: “Diversity and inclusion play an important role in guarding against groupthink within firms. Firms in which a broad range of perspectives is welcomed and encouraged will manage their risks better, advancing the PRA’s objective of safety and soundness. Stronger diversity and inclusiveness should also make firms more competitive by enabling them to attract a wider pool of talent.”

“For UK financial services to be competitive and for the companies in it to be well run with healthy work environments, its vital they attract, retain and promote the best talent.”

Nikhil Rathi, Chief Executive, FCA

The proposals set flexible, proportionate minimum standards to raise the bar, placing more requirements on larger firms, these measures include:

• Develop a diversity and inclusion strategy setting out how the firm will meet their objectives and goals. 
• Collect, report and disclose data against certain characteristics. 
• Set targets to address under-representation. 

Nikhil Rathi, Chief Executive, FCA said: “For UK financial services to be competitive and for the companies in it to be well run with healthy work environments, its vital they attract, retain and promote the best talent. The data suggests this isn’t happening. Our proposals will encourage the largest firms to put in place plans and report against their delivery.”

Bullying and sexual harassment

The proposals include new rules and guidance to make clear that misconduct, such as bullying and sexual harassment, pose a risk to healthy firm culture. 

Non-financial misconduct will be explicitly included in:

• The Conduct Rules;
• Fit and Proper assessments; and
• Suitability guidance on the Threshold Conditions.

The FCA will amend the Handbook to reflect their publicly expressed view that non-financial misconduct is misconduct and not an additional principle. This guidance will help ensure firms can take decisive and appropriate action against employees for such behavior.  

“We have taken a lead among regulators in taking a clear stance that non-financial misconduct, such as sexual harassment, is misconduct for regulatory purposes. We’re strengthening our expectations on how the firms we regulate consider such misconduct when deciding whether someone is fit and proper to work within the industry”, warned Nikhil Rathi, Chief Executive, FCA.

Diversity and inclusion data

Despite progress, through work led by the Government, as well as voluntary initiatives – such as, the Treasury’s Women in Finance Charter and the Parker and FTSE Women Leaders Review; research shows there is more to be done to improve diversity and inclusion in the financial sector.

• The most recent Women in Finance Charter Annual Review reported that in 2022, female representation in senior management among charter signatories averaged 35%.   
• FCA’s Financial Lives research shows that people from a minority ethnic background are much less likely to have private pension provision, savings accounts or protection policies.   
• Deloitte reports that just 19% of executive positions in banking, capital markets and payments are held by women.  
• The latest Parker Review found that over 100 of the FTSE250 either have no ethnic minority representation on their boards or are unable or unwilling to provide data.  
• CityWire’s Alpha Female Report 2023 has shown the number of female fund managers rose to only 12% in the last year. 

While diversity and inclusion is a broad issue for society, the FCA and PRA consider that there is a role for regulators to play where diversity and inclusion is relevant to their objectives. The consultation is open until December 18, 2023. The regulators welcome comments on the proposed approach taken and the feedback will be used to develop final rules planned for publication in 2024.