In recent years, there has been a growing recognition of the importance of diversity and inclusion (D&I) in the financial sector.
The Financial Conduct Authority (FCA) firmly believes that enhancing D&I within the financial services sector offers significant advantages for consumers and markets. As part of this vision, firms should set a top-down example by promoting diversity and inclusivity to cultivate a positive work culture that encourages all employees to contribute, challenge, and express their concerns. This emphasis on diversity not only provides access to a broader range of skills, knowledge, and experiences but also enriches decision-making and product/service development. Moreover, it increases competitiveness by expanding the talent pool. The benefits of a diverse workforce encompass reduced groupthink, healthier workplace cultures, more effective and responsible decision-making, and better representation of the needs of a varied consumer base.
For these reasons, in September of this year, the Financial Conduct Authority (FCA) published a consultation paper, "Diversity and Inclusion in the Financial Sector - Working Together to Drive Change." In this consultation, the FCA introduces 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.
A notable aspect of these proposals is the explicit inclusion of non-financial misconduct (NFM) considerations in various sections of the FCA Handbook, including the FCA's conduct rules (COCON), the 'fit and proper' test section (FIT 2), and the suitability threshold condition in the threshold conditions section (COND).
Addressing Non-Financial Misconduct
The proposal widens the scope of the COCON sourcebook to include serious cases of bullying, harassment, and similar behaviour directed towards employees. The conduct rules will be more specific and will offer additional guidance on what constitutes serious misconduct that breaches the rules and what falls outside their scope. This clarity will also help differentiate between an employee's personal or private life and their professional conduct.
Fitness and Propriety
Under the proposed requirements, firms must ensure that their relevant employees are continuously evaluated for their fitness and propriety. The FCA's proposal explicitly states that an individual's fitness and propriety assessment takes into account workplace bullying and similar misconduct. Additionally, the proposal extends this evaluation to equally serious behaviours in an individual's personal or private life. The aim of these proposed changes is to prevent situations where individuals involved in serious non-financial misconduct outside the workplace, such as a sexually motivated offence, could still meet the criteria of being considered 'fit and proper.'
Data Reporting and Transparency
Additionally, firms must publicly disclose the D&I data they provide. These measures collectively aim to ensure a more inclusive and diverse environment in financial institutions while also holding them accountable for their progress.
In addition to these requirements, and in order to reduce regulatory burden and ensure proportionality, the FCA requires that certain companies must also disclose their diversity and inclusion strategy. Their evaluation is based on the "large firm threshold," which calculates the average number of employees over a rolling three-year period with a specific annual reference date.
Smaller firms with fewer than 250 employees and limited-scope firms under the Senior Managers and Certification Regime (SM&CR) are not subject to the same requirements. However, they can voluntarily adopt the proposed requirements as good practice standards.
Larger firms with 251 employees or more must collect specific diversity and inclusion data annually for their board, senior leadership, and all employees. Firms are required to create a robust Diversity and Inclusion (D&I) strategy, a pivotal component overseen by the board. This strategy serves as the cornerstone of an organisation's commitment to fostering a diverse and inclusive workplace. It encapsulates the firm's objectives, provides a concise overview of existing arrangements, and outlines a clear plan for achieving its D&I goals while meticulously measuring progress. This includes demographic characteristics, inclusion metrics, and set targets with mandatory characteristics such as age, sex or gender, ethnicity, religion, disability, and sexual orientation forming an essential part of this process. Crucially, this strategy is required to be readily accessible, with firms encouraged to make it available on their websites. The information must also be reported to regulators through a regulatory return.
The strategy needs to include these components:
Firms are expected to provide comprehensive information regarding data related to target setting and progress. This encompasses demographic characteristics for which targets have been set, the specific percentage at which each target is established, the year of initial target establishment, the target's expected completion year, the current level of representation against each target (expressed as a percentage), the rationale for target setting, and any additional information deemed relevant by firms for the FCA's consideration. This data should be reported within the same three categories used for the targets: board, senior leadership, and the entire workforce.
It is important for companies to be cautious when implementing measures to address underrepresentation in their workforce, so as not to violate the Equality Act 2010. Although the Act allows for "positive action" in certain circumstances, it must be implemented carefully to avoid discriminating against individuals who do not share the protected characteristic being addressed. For instance, if a company sets a target to increase the number of women in its workforce, it should be able to provide evidence that clearly demonstrates that there is a genuine lack of female representation. Additionally, companies should maintain thorough records of their recruitment decisions to ensure transparency and fairness.
Firms are now entrusted with the responsibility of collecting and reporting numerical data annually. This robust dataset encompasses various demographic characteristics, inclusion metrics, and progress toward the established targets mentioned earlier. Such rigorous data reporting enables the FCA to compile an industry D&I report, facilitating trend analyses, pinpointing areas for improvement, and catalysing progress. While some data reporting is obligatory, firms are encouraged to go the extra mile by providing additional data on a voluntary basis.
The mandatory demographic characteristics encompass age, sex or gender, disability, ethnicity, religion, and sexual orientation. The reporting requirements are not an exact replica of the nine "protected characteristics" enshrined in the Equality Act. For example, there is no mandate to report on pregnancy and maternity or marriage and civil partnership. Likewise, the requirement is to report data related to gender identity rather than the protected characteristic of gender reassignment, and socio-economic background is not among the protected characteristics.
However, firms are granted the flexibility to report on additional facets such as sex and gender, gender identity, socio-economic background, and parental and carer responsibilities.
Furthermore, firms are mandated to gauge the pulse of their workforce's inclusion through a range of inclusion metrics. These metrics are garnered through employee surveys and serve as a critical barometer of a company's D&I health. They delve into whether employees feel safe to voice concerns about inappropriate behaviour or misconduct, whether they can express disagreement or challenge prevailing opinions without fear of repercussions, whether their contributions are genuinely valued, and whether they experience discriminatory treatment. Additionally, they inquire whether employees feel at ease making an honest mistake and whether they believe their managers foster an inclusive work environment. Inclusion data should be collected on an anonymous and voluntary basis through these surveys, employing a five-point scale from "strongly agree" to "strongly disagree," with the inclusion of a neutral option and a "prefer not to say" alternative.
The proposed changes put forth by the FCA signal a significant step toward achieving greater diversity and inclusion in the financial sector. By addressing non-financial misconduct, setting clear targets, and promoting transparency through data reporting, the financial industry aims to create a more inclusive, diverse, and accountable environment that benefits consumers, markets, and firms alike. As these proposals move forward, they have the potential to drive real change and ensure that the financial sector becomes a model of diversity and inclusion for other industries to follow.
The final responses to the questions presented in FCA CP23/20 are expected to be submitted by December 18, 2023. The FCA has indicated that a policy statement will be issued in 2024. It is proposed that the changes introduced by the FCA will take effect 12 months following the publication of the future FCA policy statement. The Institute is gathering feedback and would be very grateful for input from members. Please get in touch via firstname.lastname@example.org.
 Non-Part 4A firms such as payment services and e-money firms governed by different legal and regulatory frameworks are also not included in this consultation paper.