FCA and PRA Propose Measures to Boost Diversity and Inclusion in Financial Services

In a move aimed at advancing diversity and inclusion in the financial services sector, the UK's Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have proposed a series of measures to promote a more inclusive culture within regulated firms. These measures not only emphasize the importance of diversity but also seek to improve the safety, soundness, and overall effectiveness of financial institutions while better addressing diverse consumer needs.

The regulators contend that increased diversity and inclusion can lead to enhanced internal governance, more informed decision-making, and improved risk management, ultimately contributing to the overall well-being of financial institutions.

Key Proposals:

1. Clearer Stance on Misconduct: The FCA and PRA intend to introduce new rules and guidance that explicitly state that non-financial misconduct, such as bullying and sexual harassment, poses a risk to a healthy firm culture. This guidance will assist firms in taking swift and appropriate action against employees engaged in such behavior.
2. Diversity and Inclusion Strategy: Firms will be required to develop a diversity and inclusion strategy outlining how they plan to achieve their objectives and goals in this regard.
3. Data Collection and Reporting: The proposals will necessitate firms to collect, report, and disclose data pertaining to certain characteristics, thus fostering transparency in their diversity efforts.
4. Setting Targets: Firms will be encouraged to set targets to address under-representation and make tangible strides towards greater diversity.

These proposed measures set flexible and proportionate minimum standards, with larger firms expected to bear more substantial responsibilities. Flexibility is a cornerstone of these proposals, acknowledging that each firm is unique and should devise its own tailored solutions.

Nikhil Rathi, Chief Executive of the FCA, emphasized the need for the financial services sector to attract, retain, and promote the best talent. He stated that these measures aim to encourage larger firms to formulate plans and report on their progress in the pursuit of diversity. Rathi also highlighted the importance of diversity in enhancing competitiveness and the global appeal of UK financial services.

Sam Woods, Chief Executive of the PRA, highlighted the significance of diversity and inclusion in guarding against groupthink within firms. He pointed out that firms welcoming a broad range of perspectives are likely to manage risks more effectively and be more competitive by attracting a wider pool of talent.

While acknowledging progress made through government-led and voluntary initiatives like the Women in Finance Charter and various diversity reviews, the FCA and PRA have chosen to play a regulatory role where diversity and inclusion align with their objectives. The proposed rules aim to translate increased diversity and inclusion within firms into better governance, decision-making, and risk management, ultimately promoting the safety and soundness of financial institutions and benefiting markets and consumers.

The consultation period for these proposals is open until December 18, 2023. Stakeholders are encouraged to provide feedback, and the regulators will consider this input as they work to finalize the rules, which are expected to be published in 2024.