The FCA and PRA propose measures to boost diversity and inclusion in financial services

The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have announced the launch of a joint consultation on a new regulatory framework on Diversity and Inclusion (D&I) for respective supervised firms. This joint consultation follows the publication of and feedback from a discussion paper published in 2022 (EventID 11794) in which the regulators outlined different policy initiatives that they thought could be effective for driving and supporting change for more diversity and inclusion in the workforce of supervised firms. The now launched consultation is in fact split up in two separate consultation papers – one of each regulator – due to the fact that any final rules would affect two separate rulebooks, policy statements, or statements of policy and that each Authority already has some form of rules in place concerning the matter. Hence, while one regulator may only have to adjust various rules or statements, the other may have to draw up new rules altogether.
Specifically, the two regulators propose to impose requirements upon supervised firms that aim to
– bring about more diversity which in turn leads to a better understanding of clients and their needs and to better decisions making and risk management within firms themselves;
– support the development of an open, strong corporate culture; and
– ensure that practices such as harassment or mobbing are banned from the workplace.
The text below briefly summarizes the key proposed pillars of the new D&I regulatory framework for FCA and PRA supervised firms; it shall be noted at this point that some requirements will only apply to „large“ firms (251 employees or more) and to CRR and Solvency II firms. The applicability of the proposed requirements is illustrated the following graphic.
Table 1 – Applicability of the proposed requirements

#### Pillars of the new D&I Framework
(1) Developing a D&I strategy: The regulators propose to require firms to establish and publish a firm-wide diversity and inclusion strategy. This strategy would have to be published on a firm’s website, regularly reviewed, and updated to reflect a firm’s current position and approach in this matter. The diversity and inclusion strategy would have to include elements such as a firm’s core values, its desired corporate culture, and its commitment to diversity and inclusion. Additionally, the strategy would have to outline clear objectives and goals for enhancing diversity and inclusion, along with a plan to achieve them. It would also have to include mechanisms for measuring progress and define the role of the firm and its staff in fostering an open and inclusive environment.
(2) Risk and control functions: Firms would be expected to develop and review their diversity and inclusion strategies with support from appropriate risk and control functions within the organization. These functions should not only ensure compliance with regulatory and legal requirements, but also assess how effectively diversity and inclusion practices are integrated into the company’s operations. The risk and control functions should facilitate accountability by reporting their findings to senior management and the Board, allowing for monitoring of progress, strategic improvements, addressing deficiencies, and targeted interventions.
(3) Setting diversity and inclusion targets: The regulators propose to oblige firms to set targets within their firms as to the representation of various genders and ethnic groups. The targets – at least one each – would have to be set for the Board, senior management, and the entire staff. The targets should be aligned with a firm’s D&I strategy and take into account a firm’s existing diversity profile which naturally requires data collection in these areas. The PRA and FCA would expect firms to consider the context in which a firm operates by examining available data on the diversity profiles of the UK population and the geographical areas in which it conducts regulated activities. Furthermore, firms would be required to conduct regular reviews of their targets to ensure that these targets remain challenging yet achievable. Again, a firm’s board would be responsible for overseeing and monitoring progress in this area. Firms would also be required to publicly disclose their D&I targets and their progress toward achieving them on an annual basis. Targets for inclusiveness would be voluntary.
(4) The function of the Board of Directors: The PRA and FCA suggests that boards of supervised large, CRR, and Solvency II firms be required to take collective responsibility for diversity and inclusion initiatives, similar to their responsibility for the overall strategy and culture of a firm. Boards would also be required to oversee and track progress in diversity and inclusion, identify obstacles, and implement interventions wherever needed. Furthermore, the regulators suggest that boards should ensure that management promotes diversity and an inclusive culture that encourages open discussion and effective decision-making. Incentives, including remuneration, should be used to drive progress in diversity and inclusion, especially among responsible Senior Managers.
(5) Reporting on inclusion and diversity: The regulators propose to require firms to annually report specific diversity and inclusion metrics related to board members, senior leadership, and employees in different categories. The metrics – which are outlined in the enclosed „REPxxx – Diversity and Inclusion“ xls file, would capture information on
– the composition of the workforce categorized by age, ethnic group, gender, and various other factors;
– the functions or positions held within firms by various categories of employees;
– the targets a firm has set; and
– the results on an inclusion survey, grievance reporting, or exit interviews which indicate employees‘ satisfaction with the culture of a firm (see the comment box below).
Subsequent to each annual return, the Authorities plan to produce aggregated benchmarking reports for regulated firms, allowing them to compare their diversity and inclusion efforts with peers and the wider financial market sector.
(6) Disclosures on D&I: Both regulators suggest to require firms to disclose on their website information on the following:
– diversity and inclusion data similar to the one that would have to be reported annually to the PRA and FCA;
– Board and firm-wide diversity and inclusion strategies;
– targets that firms have set for themselves and their policy for achieving their targets;
– a narrative of the reasons why firms have set certain targets; and
– progress against the targets over time.
The disclosures would have to be made at least annually, for example alongside the financial reports, and would have to be easy to understand and free of costs. Additionally, the regulators would expect explanations when significant changes have been made as compared to the prior disclosure period.
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#### Non-financial misconduct
The PRA and FCA propose to revise their rules and / or add additional rules or guidance to address non-financial misconduct in the workforce. Non-financial misconduct would thereby encompass behavior such as harassment, including sexual harassment, mobbing, discrimination, or any other form of victimization at the workplace. In detail, the regulators would include non-financial misconduct in the rules applicable to the fitness and propriety assessments of Board members and senior executives, their conduct rules, and the suitability rules when deciding whether or not a firm is suitable for being registered and carrying out business in the UK.
Factors the regulators would take into account in their assessment of whether or not enforcement action shall be taken include the following:
– the frequency of misconduct;
– the duration of misconduct
– the extent of the impact of the misconduct on the affected person.