FCA and PRA Publish Consultation on New Rules Relating to Diversity and Inclusion

Key Points

• Following a joint Discussion Paper in 2021 issued by the UK Financial Conduct Authority (FCA) and the UK Prudential Regulation Authority (PRA), both regulators have now issued Consultation Papers proposing new rules and guidance in relation to diversity and inclusion in the financial services sector.
• Whilst the final rules are still subject to consultation, we can expect the final rules to be published in 2024 and to come into force 12 months later.
• The new rules are proposed to be tiered, with some rules (such as changes to the Conduct Rules) applying to all firms, other rules (such as reporting employee numbers) applying to most firms and certain particularly in-depth rules (for example, setting and reporting on diversity targets) applying only to large firms with 251 or more members of staff.
• Alongside the rules and guidance on discrimination, however, the FCA is also proposing to issue significant guidance on what has been a hot topic in recent years, namely non-financial misconduct.

Introduction

Following on from its earlier Discussion Paper¹on Diversity and Inclusion (D&I) in the financial sector, the FCA and the PRA have now issued Consultation Papers² proposing new rules in relation to D&I. Following receipt and consideration of the consultation feedback, final rules are expected to be promulgated in 2024, with the rules coming into effect one year later.

As well as explicitly D&I matters, the Consultation Papers also propose significant new rules and guidance in relation to non-financial misconduct. These rules are intricate and important in their own right, and we have a separate client alert on this.

Rules Applicable to All FCA-Authorised Firms

The FCA and the PRA are proposing to require all firms (other than firms which are “Limited Scope” under the Senior Managers and Certification Regime (SMCR)) to report their annual employee numbers.

Rules Applicable to Large Firms and CRR/Solvency II Firms of Any Size

For larger firms and CRR/Solvency II firms of any size, the Regulators are proposing more significant new obligations on firms in relation to D&I policies/strategies and disclosures.

For this purpose, “larger firms” will be those that are at or above the “diversity and inclusion employee number threshold”, which is defined as being a threshold of 251 or more employees. This is calculated on a solo entity basis rather than a group basis and should be calculated on a rolling  three-year average, only including employees who predominantly carry out activities from an establishment in the UK.

The aim of these rules (the “Aim”) is stated to be to require a firm to “take steps to achieve a sufficiently diverse and inclusive culture, in order to:

(a)  reduce the risks posed by groupthink and improve the firm’s decision making (particularly among senior decision makers) by: (i) promoting diversity of thought; and (ii) ensuring all staff can contribute, challenge and question the way things are done; and

(b) better understand the diverse needs of the firm’s customers, so as to: (i) reduce customer harm and poor outcomes; and tailor their products and servicers to reflect different customer needs”.³

As currently proposed, the new requirements may be categories under the following headings, and more detail is set out in the Annex:

• D&I Strategies/Policies – Firms will be required to have D&I strategies and policies, alongside other mandatory policies.
• D&I Targets – Firms will be required to set “appropriate”, “stretching but realistic” targets, in line with the firm’s D&I strategy.
• Reporting Data – Firms will be required to report to the FCA certain numerical data. Some data will be mandatory and some will be voluntary. Failure to report will be subject to the usual penalties.
• Public Disclosures – Firms will be required to make public disclosures which are similar to the reports made to the FCA, albeit making sure that individuals are not identified and all other laws (including, for example, the Equality Act 2010) are complied with.
• Risk and Compliance – The FCA is proposing new guidance for larger firms to treat D&I matters as a non-financial risk.

Next Steps

The deadline for responses to the consultation is 18 December 2023 and the FCA anticipates being able to issue a Policy Statement with final rules some time in 2024. Rules would come into force 12 months later.

We will continue to monitor and report on developments in this area, and there will be a further alert in relation to the non-financial misconduct issues which are also discussed in the Consultation Papers.

Special thank you to Masha Novikova for her contributions.

^{1 https://www.fca.org.uk/publication/discussion/dp21-2.pdf.}

^{2 Respectively, FCA: https://www.fca.org.uk/publication/consultation/cp23-20.pdf and PRA: https://www.bankofengland.co.uk/prudential-regulation/publication/2023/september/diversity-and-inclusion-in-pra-regulated-firms.}

^{3 Proposed SYSC 29.1.12 R.}