Bold Steps for Diversity and Inclusion in the Financial Sector?

In October 2023, the FCA and PRA published consultation papers outlining their proposals to create better outcomes for consumers and markets by injecting a dose of diversity and making DEI part of the financial sector’s DNA.  This article focusses in particular on Consultation Paper CP23/20 from the FCA.

The proposals cover: governance initiatives (beefing up staff fitness assessments, Conduct Rules, and criteria for firms to operate by weaving in considerations for non-financial misconduct (NFM)); as well as increased data disclosure; a requirement to develop a DEI strategy; diversity targets and the elevation of a lack of DEI to a non-financial risk.

• Non-Financial Misconduct: The FCA is exploring the idea of making adverse findings about individuals' conduct (think bullying, harassment, and discrimination) a part of fitness and propriety assessments and considering whether such behaviour should breach the Conduct Rules and require reporting to the FCA. Initial responses to the proposals support the concept, although make the point that there will be a need for clear guidance on what should and should not be reported.  Including NFM in the Conduct Rules makes sense given the impact of this kind of poor (and possibly unlawful) behaviour on workplace culture – trust is eroded, people are afraid to speak up and ultimately regulatory breaches are more likely to go undetected by the authorities, which harms the markets and consumers.  However, it also makes sense that clear guidance will be needed as firms navigate the altered landscape, because not every instance of workplace misconduct will be serious enough to amount to a breach of the Conduct Rules.

Who’s affected and what will the obligations be? The rules will vary based on the number of employees a firm has, the firm’s  role under the Senior Managers and Certification Regime (SM&CR), and whether they're dual-regulated.

Smaller firms with fewer than 251 employees will be subject to basic minimum standards to reduce discrimination and misconduct that will apply to all regulated firms, as well as an obligation to disclose average employee numbers, so that the FCA can monitor when a firm tips over into a ‘large firm’ with 251 or more employees and becomes subject to the more onerous obligations to set targets and disclose data proposed for larger firms.

Under the proposals, larger firms will be required to:

• develop a DEI strategy including clear objectives, goals, plans for meeting them, ways to measure progress, and arrangements to identify and manage obstacles. The FCA will allow firms to tailor strategies based on their unique needs and operating environments and to ensure accountability, a firm’s board will be responsible for maintaining and overseeing the strategy, as well as ensuring that the strategies are easily accessible and publicly available on the firm’s website;
• set targets to remedy underrepresentation at Board, senior leadership and employee levels, aligned with their DEI strategy, and taking into account their current diversity demographic with priority being give to areas of greater underrepresentation.  The FCA does not mandate the specific characteristics against which targets should be set, which makes sense as the diversity profile of firms will vary, but they do require transparency from firms, who would be expected to disclose targets and progress against them annually.
• provide a data report focussing on demographic characteristics and inclusion metrics across all employee levels.  This makes sense  - at mpm included we believe that data is the bedrock of good DEI work, necessary to understand where you are right now, why you are there and to measure your efforts to improve. Some firms have voiced concerns about the time, effort and cost involved in this kind of reporting, as well as the difficulty of getting employees to willingly share personal data (although our perspective is that this a chicken and egg scenario – the higher the trust, the more likely it is that employees will be comfortable sharing their information).  The FCA, undeterred, are proposing that firms collect and report on data annually with the aim of creating a standardised benchmark against which to gauge progress as well as drive positive change. However, in order to limit the burden on firms they have split characteristics with age, ethnicity, sex or gender (whichever of these two is not chosen goes into the voluntary list), religion, disability or long term health condition and sexual orientation being proposed as mandatory for reporting and other characteristics such as parental responsibilities, gender identity, carer responsibilities and socio-economic background as voluntary.  This is an interesting choice, because parental or carer responsibilities and socio-economic background can be huge barriers in the workplace in this and other sectors, and it remains to be seen if the proposals are adopted how many firms will take an expansive approach to reporting.The proposals don’t ignore inclusion, proposing that firms report on employees’ perceptions of safety to speak up, the value of their contributions and the overall inclusivity of their work environment.

What’s the goal? The FCA's wants to see real change. They say that they have spotted promising signs but acknowledge that there is still work to be done in their aim to achieve healthier firm cultures, reduced groupthink (which is a strong theme throughout the consultation paper), ways to unlock new talent, and a better grasp of diverse consumer needs.

How will they measure success? The FCA plan to keep an eye on disciplinary actions reported by firms, staff inclusion scores, increased diversity in leadership, and improved consumer feedback.

The proposals include an obligation on firms to publicly disclose aggregate diversity data on senior management and employees to increase transparency and facilitate comparisons between firms, with appropriate safeguards to prevent identification of individuals.

Our Thoughts: The FCA isn't forcing a one-size-fits-all approach, which is good news, given the diversity of types of organisation in the financial services sector. They're nudging firms to set their own targets, emphasizing that DEI isn't a threat but a golden ticket to better outcomes for everyone. By working together, the FCA hopes to fast-track meaningful change and make financial environments more diverse and inclusive.  All of this sounds like a step in the right direction, but given our experience of some of the key barriers in this sector, which have not been included in the proposals as mandatory for reporting, it remains to be seen how far reaching the impact will be if the proposals remain unchanged following the close of consultation.

ACTION: If you are an FCA regulated organisation and you haven’t yet reviewed the consultation paper, there is still time – but not much, the consultation closes on 18 December 2023.

Following the close of consultation, the FCA will publish a policy statement next year and firms will have 12 months from that point to implement the FCA’s final proposals.

mpm included focusses on helping companies create lasting and meaningful change in the world of DEI.  If you want to know more about us, click here.

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