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Print articleFCA outlines measures to improve diversity and inclusion in financial services
October, 2023 - Shoosmiths LLP
The proposals include measures to ‘support healthy work cultures, reduce groupthink and unlock talent’, in order to support the competitiveness of the UK’s financial services sector.
It is also said that the proposed framework will establish minimum standards and give firms a better understanding of what is expected of them from a regulatory standpoint, with the aim of reducing discrimination and misconduct.
The proposals
The FCA propose applying a minimum standard to all firms with a Part 4A FSMA permission, with additional requirements being introduced for large firms (defined by the threshold of having 251 or more employees). All dual-regulated CRR and Solvency II firms will also be subject to the proposals on D&I strategies, but the additional requirements would not apply to Limited Scope Senior Managers & Certification Regime (SM&CR) firms, regardless of size.
All FSMA firms with a part 4A permission (excluding Limited Scope SM&CR firms) would be required to report employee numbers to the FCA annually on ‘RegData’ so they can determine who is in the scope of additional requirements.
The FCA will then rely on the average number of employees over a rolling 3-year period as at a specified annual reference date to measure ‘large firms’. Where a firm has been authorised for less than a year, they should use the number of employees at the date of authorisation.
The proposals clearly set out the FCA’s position that non-financial misconduct is misconduct and that it includes serious instances of bullying, harassment and similar behaviour towards fellow employees and employees of group companies and contractors. They are intending to clarify this through expanding the Code of Conduct for Staff sourcebook, highlighting how bullying and similar behaviour is relevant to the ‘Fit and Proper test for Employees and Senior Personnel’ part of the handbook, and extending the guidance on the ‘suitability threshold condition’ contained in the ‘Threshold Conditions’ part of the handbook. For example, including offences relating to a person or group’s demographic characteristics and findings of discriminatory practice.
Proposals for the additional requirements for large firms include:
Establishing, implementing, and maintaining a diversity and inclusion strategy
This would include stating the firm’s D&I objectives and goals, a plan for meeting those objectives and goals, along with identifying any obstacles, and ensuring adequate knowledge of the strategy amongst staff.
Determining and setting appropriate diversity targets
This proposal aims to address underrepresentation in firms, particularly how the sharpest drops in gender and ethnic diversity occur in the step from junior to mid-level roles. It is recommended that firms set at least 1 target for each of the board, the senior leadership, and the employee population as a whole.
Collecting, reporting, and disclosing certain D&I data
The FCA propose for large firms to annually collect and report to regulators data on a range of demographic characteristics, inclusion metrics and targets. Firms will need to report as much data as is reasonably practicable in the first year and explain the reasons for any gaps and how they will be closed. An industry D&I report would then be produced, allowing for more transparency and scrutiny, and for firms and their stakeholders to see how their progress compares to their peers to drive progress.
- Mandatory demographic characteristics include age, ethnicity, sex or gender, religion, disability, and sexual orientation. Voluntary demographic characteristics could include gender identity, socio-economic background, parental responsibilities, and carer responsibilities.
- Inclusion metrics for example could be whether employees feel safe to speak up if they observe inappropriate behaviour or misconduct, whether employees feel able to express disagreement without fear of negative consequences or whether employees feel their manager cultivates an inclusive environment at work.
- Target setting could include, amongst other things, providing information on the targets firms have set, the year the firm are aiming to meet their targets and the rationale behind the target.
Recognising how a lack of D&I is a non-financial risk.
The FCA plans to introduce guidance for firms to highlight that matters relating to D&I are considered non-financial risks. For example, risk functions should consider how a lack of D&I contributes to increased groupthink and poor decision making, which can affect outcomes for consumers and markets. However, the FCA are not proposing to prescribe exactly how firms should consider these risks.
The consultation closes on 18 December 2023. The FCA will then review feedback, before developing and publishing regulatory requirements in 2024, with the aim of bringing the rules into force in 2025.
Employer considerations
As indicated above, firms with fewer than 251 employees will be exempt from the more stringent requirements, but there is evidently a push for increased diversity and inclusion and higher standards of conduct with the aim of better internal governance, decision-making and risk management.
Employers should note the changing landscape for non-financial misconduct and how the FCA are paying closer attention to conduct that is likely to damage public confidence and suggest an individual is not ‘fit and proper’. The FCA recognises how instances of bullying, harassment, discriminatory behaviour or similar can facilitate regulatory breaches and may take action against individuals. Reviewing existing equality, diversity, and inclusions policies, as well as investing in updated ED&I training will be essential for employers looking to protect themselves in this developing area.
Their message is clear: non-financial misconduct is misconduct, and the FCA believe they can make the UK market a more attractive place to work and to do business with through their new proposals which will cater to a more diverse consumer base.
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