FCA Proposes Groundbreaking Diversity and Inclusion Framework for Financial Services

The Financial Conduct Authority (FCA) is actively working to enhance diversity and inclusion (D&I) within the financial services sector through a new regulatory framework, according to an article by Dechert LLP. The proposed framework, outlined in the CP23/20 Diversity and Inclusion Consultation, covers various aspects, including integrating non-financial misconduct into Conduct Rules, suitability criteria, and Fitness and Propriety tests. Large firms would be mandated to develop a D&I strategy, alongside collecting, reporting, and disclosing data on D&I metrics.

This initiative builds upon previous D&I-related efforts, such as the FCA’s July 2021 Discussion Paper and a multi-firm review published in December 2022. The consultation period extends until December 18, 2023, with the FCA planning to finalize regulatory requirements based on feedback by 2024. The proposed rules would come into force 12 months after the publication of the Policy Statement.

For all Financial Services and Markets Act (FSMA) firms, regardless of size, the FCA suggests minimum standards to reduce discrimination and misconduct, fostering inclusive workplace cultures. This includes incorporating non-financial misconduct, such as harassment, into Conduct Rules, Fitness and Propriety assessments, and suitability criteria.

Large firms and Capital Requirements Regulation (CRR) and Solvency II firms face additional requirements, including the development of evidence-based D&I strategies. These strategies should outline objectives, progress measurement, and awareness plans, overseen by the board and made accessible to the public. Firms are also required to set targets addressing underrepresentation across the board, senior leadership, and the employee population, with annual disclosure of progress.

Data reporting forms a crucial aspect, with mandatory reporting on characteristics like age, gender, disability, ethnicity, religion, and sexual orientation. Inclusion metrics, reflecting employee sentiments on safety, contributions, and inclusive environments, would also be reported anonymously and voluntarily. The FCA aims to produce aggregated disclosure reports to facilitate peer benchmarking and progress tracking.

Despite the comprehensive nature of these proposals, the FCA has opted not to move forward with certain ideas presented in its July 2021 Discussion Paper, considering factors like unintended consequences and high costs.

The FCA’s focus on D&I represents a significant shift in regulatory compliance, requiring firms, especially larger ones, to proactively address and report on their D&I efforts. Implementation would likely be complex, necessitating careful planning, senior management engagement, and adherence to data protection regulations. Firms are encouraged to consider compliance steps well in advance, given the anticipated 12-month lead time for these regulations to take effect.