In consultation papers, the financial regulators have set out proposals to boost diversity and inclusion to support healthy work cultures, reduce groupthink and unlock talent.

The measures also aim to enhance the safety and soundness of firms and improve understanding of diverse consumer needs. Increased diversity and inclusion in regulated financial services firms can deliver better internal governance, decision making and risk management.

The proposals include new rules and guidance to make clear that misconduct such as bullying and sexual harassment poses a risk to healthy firm culture.  This guidance will help ensure firms can take decisive and appropriate action against employees for such behaviour.

FCA Chief Executive Nikhil Rathi 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.

‘UK financial services has long been a magnet for best-in-class talent globally. Increasing levels of diversity within firms can help attract and unlock talent, supporting the sector’s international competitiveness.

‘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.’

PRA Chief Executive Sam Woods 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. We are tabling proposals today which we think will advance our objectives, alongside existing core parts of our regime such as capital and liquidity requirements, and we welcome views on them from all stakeholders.’

Work led by the Government, as well as voluntary initiatives, have already made progress. This includes projects such as the Treasury’s Women in Finance Charter, as well as the Parker and FTSE Women Leaders Review. 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 FCA and PRA have brought forward proposals today having received broad support for doing so in their 2021 Discussion Paper.

The proposals set flexible, proportionate minimum standards to raise the bar, placing more requirements on larger firms. Proposals set out for firms include requirements to:

• 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.

Flexibility is at the heart of the proposals. Each firm is different, and they need to come up with their own solutions. Most of these requirements, including setting targets, regulatory reporting and disclosure, would only apply only to the largest firms.

The proposed rules aim to see increased diversity and inclusion in firms translate into better internal governance, decision making and risk management. That contributes to promoting the safety and soundness of firms, policy holder protection and better outcomes for markets and consumers.

The consultation is open until 18 December 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.

Source: FCA