CGIUKI responds to the FCA and PRA consultation ‘Diversity and inclusion in the financial sector’

Following the growing recognition of the importance of diversity and inclusion (D&I) in the financial sector, in September 2023 the Financial Conduct Authority (FCA) together with the Prudential Regulation Authority (PRA) published a consultation paper titled "Diversity and Inclusion in the Financial Sector − Working Together to Drive Change." In this consultation, they introduce a proposed framework that sets out minimum standards for diversity and inclusion (D&I) and helps firms better understand what the FCA expects regarding D&I.

The proposals, expected to take effect in 2025, outline requirements for firms based on size, covering the development of diversity strategies, monitoring staff demographics and setting diversity targets. The proposals will apply to firms of different sizes and primarily to employees based in the UK, with limited exclusions. The FCA also suggests amending COCON to include non-financial misconduct (NFM), such as serious cases of bullying and harassment, with guidance on the types of behaviour falling within the scope. These proposals are also applicable to overseas firms that conduct activities in the UK from “an establishment in the UK.”

Assuming these proposals move forward given the government’s decision to pause new regulations for a non-financial reporting review, the Institute, with input from members, has responded to the consultation.

While we may not fully agree with arguments made against the UK regulatory system, we acknowledge a valid case that there are potential disincentives for companies to list or domicile in the UK, impacting the growth of UK plc. Therefore, we recommend that the FCA and PRA postpone any action until a coherent government-defined way forward emerges, enabling consistent and complementary requirements from relevant regulators.

This is not to say that D&I measures are not important, but rather that we need a well thought out, cohesive approach from the government and relevant regulators to effectively achieve common goals. There’s no fundamental difference, in our view, between D&I in the financial sector and other UK sectors.

Furthermore, we believe that the FCA and PRA should focus more on managing behaviour in regulated markets − rules relating to corporate reporting properly fall within the purview of the Financial Reporting Council, not the FCA and PRA.

In this context, our response aimed at fostering a more consistent and coordinated approach to achieve diversity goals without unduly burdening companies. We suggested refining the regulatory proposal by adopting clearer and more defined metrics for diversity and inclusion. Our recommendation emphasises a staggered and phased approach, aiming for a less burdensome compliance route for companies, accompanied by comprehensive guidance.

Among the points made, we recommended steering away from a solo entity approach, as it complicates compliance for larger corporations with subsidiaries.

We argued that the current metrics and definitions in regulatory proposals present practical challenges. The PRA adopts a more prescriptive approach, while the FCA maintains flexibility. Dual-regulated firms may face a potential regulatory burden due to differing rules. Again there is an unanswerable case for joined-up regulation.

We encouraged a more strategic and comprehensive list of characteristics to prevent the regulatory proposal from becoming a mere tick-box exercise. A thoughtful staggered approach would allow the expansion of the list of protected characteristics, aligning with ongoing discussions to broaden these under the Equality Act 2010. Furthermore, companies should be allowed to explain improvements further down the organisational structure for long-term progress.

We supported the amendments to include NFM but emphasised the need for balanced and neutral guidance to prevent a moral compass effect. A staggered approach was suggested for effective implementation.

We proposed expanding the reporting window to six months and adopting a staggered approach due to the practical challenges of handling a large amount of data. This might include, for example, an annual submission for the report on mandatory demographic characteristics and a two or three-year submission for the report on non-mandatory demographic characteristics.

Similarly, while supporting the proposal for mandatory reporting for some demographic characteristics and voluntary for others, we advocated a phased approach to making all demographic characteristics mandatory over time, thereby avoiding excessive regulatory burden.

Finally, we suggested that the FRC and PRA provide clear guidance for companies on engaging employees with D&I matters. Additionally, we called for guidance on how the data will be used to support diversity without drawing negative conclusions, providing reassurance to the industry that the data sets created will not be used to draw conclusions about the workplace culture of a firm.

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