FCA & PRA propose change for UK diversity & inclusion requirements

In September 2023, the FCA released their consultation paper CP23/20, which focused on diversity and inclusion (D&I) changes in the financial sector alongside the PRA’s consultation paper CP18/21, which outlined D&I considerations in PRA-regulated firms.

Diversity & inclusion as a regulatory issue 

Financial services firms, especially regulated ones, should have the FCA’s agenda concerning D&I firmly on their radar. The wider objective pushes for the establishment of a financial system that is better able to support the economy through well-run businesses and sound financial markets created to meet the various needs of consumers. A further notion is to have a more "resilient financial services sector" of which D&I is a component.

Further guidelines will be needed as businesses engage in meaningful dialogues to bring about cultural changes and a successful promotion of D&I in the workplace.

What is the purpose of the FCA’s diversity & inclusion proposals?

They have a threefold aim:

1. Better integration of non-financial misconduct considerations into staff fitness and propriety assessments
2. SM & CR Conduct Rules
3. Suitability criteria for firms to operate in the financial sector (threshold conditions)

Who will be affected by the FCA’s diversity & inclusion requirements?

The proposals apply only to employees who carry out their activities from a UK establishment. For overseas firms, the proposals apply only to activities of the firm that are carried out from the UK establishment.

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 Consultation acknowledges that D&I requirements cannot be implemented through a ‘one size fits all’ approach, and therefore, smaller businesses with fewer than 251 employees would be excluded from several of the rules to lessen the regulatory load. 

D&I proposals in more detail – what do they mean? 

1. Non-financial misconduct

The FCA Consultation proposes to integrate non-financial misconduct on issues such as bullying, sexual harassment and discrimination into fitness and propriety assessments (for individuals performing a Senior Management Function (“SMF”) or a Certification function). This includes all FCA regulated firms and to their personnel. 

2. D&I strategies

The FCA Consultation proposes in-scope firms to develop an evidence-based D&I strategy (the “D&I Strategy”) that must contain, as a minimum:

• The firm’s D&I objectives and goals
• A plan for meeting those objectives and goals and measuring progress
• A summary of the arrangements in place to identify and manage any obstacles to meeting the objectives and goals
• Ways to ensure adequate knowledge of the D&I strategy amongst staff

3. Setting D&I targets

The FCA Consultation proposes to set diversity targets to address underrepresentation within their firms. The FCA further states that it expects firms to set targets at board, senior leadership, and general workforce level. It also proposes in-scope firms to publicise their targets and their progress towards them annually and to report on progress to the regulator.

4. Reporting requirements

The FCA Consultation will require all FSMA firms with a Part 4A permission to report their average number of employees, to enable the regulators to monitor which firms will be in and out of scope of the various D&I requirements.

What could be the impact on businesses and corporate service providers?

The Consultations closed in December 2023 so both regulators expect to review the feedback and develop final regulatory requirements in 2024. Any changes would become effective 12 months after the publication of the final rules, to give firms time to prepare.

Likely obligations;

• Recognise a lack of D&I as a non-financial risk
• Report average number of employees to the FCA on an annual basis
• Collect, report and disclose certain D&I data
• Establish, implement and maintain a D&I strategy

Targets might be at least 40% of the board are women, and at least one senior board position is a woman (e.g. CEO, CFO etc.), and at least one board member is from an ethnic minority background.

• Determine and set appropriate diversity targets, progress on which may need to be publicly reported

How can Ocorian help?

Ocorian can support your business should these proposals become law.

If you’d like to find out more, contact our team today.