UK: FCA and PRA consult on diversity and inclusion in the financial sector

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Hogan Lovells

On 25 September 2023, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) published long-awaited proposals to introduce a regulatory framework for diversity and inclusion (D&I) in the financial sector.  The FCA’s proposals in CP23/20 have been developed in parallel with the PRA’s proposals which are set out in PRA CP18/23.  The  proposals build on the increasing recognition for a need to improve D&I outcomes amongst regulated firms and are designed to further accelerate D&I change across the financial sector. The proposals aim to help firms understand the practical steps they should take on D&I to meet regulator expectations on this key policy area.

FCA CP23/20 and PRA CP18/23 promote diversity and inclusion in financial services

In FCA CP23/20: ‘Diversity and inclusion in the financial sector – working together to drive change’  the FCA sets out its proposed framework to establish minimum D&I standards and give firms a better understanding of the FCA’s D&I expectations. Similarly PRA CP18/23 ‘Diversity and inclusion in PRA-regulated firms’ sets out the PRA’s proposed rules and expectations aimed at improving D&I in PRA-regulated firms. The proposed FCA and PRA D&I framework is designed to ensure greater consistency and transparency across the sector. The FCA will host a webinar on the proposals on 30 October 2023 to discuss the proposals.  Final responses to the questions set out in FCA CP23/20 and the proposals set out in PRA CP18/23 are due by 18 December 2023.  The FCA states that a policy statement will follow in 2024.  The proposed implementation date for the FCA changes is 12 months following the publication of the future FCA policy statement.

The FCA and PRA set out that improvements to D&I in the financial services sector can benefit consumers and markets by:

  • helping to reduce groupthink; 
  • supporting healthier work cultures;
  • more effective and prudent decision-making;
  • a better understanding of the risks facing a firm; 
  • unlocking diverse talent and widening the talent pool; and
  • improving how firms understand and provide for diverse consumer needs. 

The FCA expects the firms it regulates to ‘foster healthy work cultures’ in which all employees feel comfortable contributing, providing challenge and voicing their concerns. The FCA sets out that greater diversity can help firms access a range of skills, knowledge and experiences when making decisions or designing products or services. It can also support competitiveness by widening the sector’s talent pool.  The PRA considers that firms should set an appropriate ‘tone from the top’ which in turn will support diverse and inclusive practices, to help foster a healthy and prudent risk culture across the wider organisation of a firm.

Non-financial misconduct

The FCA and PRA proposals for D&I clarify and strengthen expectations around non-financial misconduct which will apply to all firms (large and small) across the financial services sector.  Non-financial misconduct will encompass issues such as bullying, sexual harassment or racially motivated offences. For the first time, the concept of non-financial misconduct will be incorporated in other established rules (for example in the rules around regulatory references, conduct rules and fitness and propriety). Whilst non-financial misconduct has been previously mentioned in FCA and PRA speeches it has yet to be specifically addressed in FCA and PRA rules, this will change once the FCA and PRA D&I framework is finalised.  

D&I reporting, targets and monitoring

The FCA and PRA propose that the largest financial services firms (those already required to publish their gender pay gaps), report on certain characteristics, for example disability status and ethnicity. Firms will be given the option to go further, for instance voluntarily reporting additional data such as socio-economic background information and gender identity to help gather data to identify where additional change and interventions might be needed.  Over time, the expectation is that firms will report against all characteristics and mandatory reporting might be considered at a later date.  The PRA and the FCA also propose to use this D&I data to produce an aggregated industry-wide benchmarking report.  The largest firms would be required to set their own diversity targets where they identify underrepresentation subject to a minimum of targets for women and ethnicity, if underrepresentation is identified. The largest firms should disclose information on the targets they have set for themselves, the demographic diversity of their organisation, and the outcome of inclusion surveys. Firms should monitor D&I internally and take appropriate actions where necessary.

D&I strategies and individual accountability

As set out in both FCA CP23/20 and PRA CP18/23, large firms (over a threshold or those which are PRA regulated including banks and insurers) should publish firm-wide strategies setting out their plans for D&I. The FCA stresses flexibility in relation to this stating that they will not prescribe how the plans should be drafted given that every firm is different.  The PRA goes further in setting out minimum expectations of what it expects a strategy to include as follows:

  • the firm’s core values, the culture that it is trying to create, and its commitment to diversity and inclusion;
  • clear objectives and goals for improving diversity and inclusion in the firm, and a plan for meeting these;
  • ways of measuring progress against the objectives and goals; and
  • the role of the firm and staff in fostering an open and inclusive environment, including empowering colleagues to speak up and express their views

The PRA also proposes a new senior manager responsibility for a firm’s D&I strategy and expectations on the role of risk and control functions in supporting the strategy.  In contrast, the FCA states that it has decided not to amend its rules and guidance to require culture or D&I to be allocated to a specific Senior Management Function (SMF).  The PRA also It also proposes to clarify that objective findings of patterns of behaviour such as bullying, discrimination, and harassment can be considered as part of fitness and propriety assessments.


The regulators state that they recognise the need for proportionality for smaller firms. There will be a tiered application of D&I rules depending on the firm type/size. Smaller firms (of 250 employees or less) and Limited Scope firms under the Senior Managers and Certification Regime (SM&CR) will not be subject to the same requirements as other firms.

Background to the D&I consultations set out in FCA CP23/20 and PRA CP18/23

In July 2021, the FCA took an important step towards making rapid and more substantive progress across the financial sector and published a joint discussion paper (DP21/2) with the PRA.  

In DP21/2, the FCA set out that D&I was critical to its work on culture and governance, particularly for boards and senior management.  D&I should be considered in the context of the  treatment of consumers, including vulnerable customers and when applying the new Consumer Duty.

The goal of increasing D&I in financial services aims to accelerate a move to safer and sounder firms with better internal governance and risk management controls, a more innovative industry, and financial products and services that meet the diverse needs of consumers. To achieve this, it does not intend to prescribe a “one size fits all” approach to DE&I but it is of the view that policy has an essential part to play in driving change.  DP21/2 saw the FCA engage with a wide range of stakeholders to understand the best approaches to help tackle a supervisory approach to D&I.

The findings to DP21/2 published in December 2022, highlighted the need for evidenced-based measures and the monitoring of these measures as well as addressing fundamental cultural issues such as psychological safety and welcoming different perspectives that are critical to an inclusive culture.  The findings to DP21/2 have helped to inform FCA CP23/20.

Diversity of boards and executive management

On 4 April 2022, the FCA published its final policy (PS22/3) on promoting transparency on the diversity of listed companies’ boards and executive management following on from CP21/24.

Under specific Listing Rules introduced by PS22/3, UK and overseas issuers with equity shares or certificates representing equity shares admitted to the premium or standard segment of the FCA’s Official List (including closed-ended investment funds and sovereign controlled companies) must now disclose the breakdown of diversity by sex or gender and ethnicity for their boards and executive management.  Companies not meeting the targets need to explain the reasons for this to the FCA.

On 20 March 2023, the FCA followed up with a reminder of the disclosure rules in Primary Market Bulletin No 44, which discusses disclosure requirements relating to D&I on boards and executive management.

FCA Diversity, Equity and Inclusion Innovation Spotlight

On 24 August 2022, the FCA launched a Diversity, Equity and Inclusion Spotlight initiative encouraging firms developing innovative products focused in the D&I space to work with the FCA’s Innovation services. In this ongoing initiative, the FCA invites firms interested in launching an innovative product or service in the DE&I space that focuses on fair treatment of customers, vulnerability and the Consumer Duty to apply to its Regulatory Sandbox or Innovation Pathways

FCA/PRA/BoE speeches on diversity and inclusion

In a speech delivered at the Association of British Insurers (ABI) Diversity and Inclusion conference in November 2022, Sheldon Mills, the Executive Director of the FCA’s consumer and competition division underlined the need to achieve a more diverse and inclusive financial services industry. This is reflected in the FCA Business Plan 2023/2024 which outlines the FCA’s plan to foster increased D&I transparency.  The speech discussed how D&I is a 2-sided problem: “first, internal representation within our organisations, second, externally, sufficient knowledge and understanding so that we can serve our diverse society well. That isn’t just about race or a gender debate, it’s also about social mobility, class or levelling-up – ensuring that we serve all communities.”  The speech also highlighted the importance of D&I data in lifting the fog of uncertainty and allowing firms to identify where they are doing well and where intervention might be needed. It also allows firms to measure and hold themselves accountable for the progress they are making. The FCA has underlined the importance of D&I data in its pilot data survey in 2021 and multi-firm review in 2022 to explore how firms design and embed their DE&I strategies.

In an earlier FCA speech delivered in March 2021, Nikhil Rathi, CEO of the FCA, emphasised the importance of D&I in driving innovation, reducing misconduct, and building trust in financial markets. The FCA is of the view that a diverse workforce reflects the diverse communities it serves, leading to better decision-making and improved outcomes.

In a speech in September 2021, Sam Woods, CEO of the PRA, stressed the need to continue working on D&I initiatives and collaborating with the FCA in relation to relevant policy initiatives. The PRA's approach to diversity focuses on fostering an inclusive environment and promoting diversity across boards and senior management.

The BoE has implemented various initiatives to drive D&I.  In April 2023, Afua Kyei, the Executive Finance Director of the BoE, made a speech outlining some of the key themes in relation to diversity and inclusion in the financial sector.

D&I links to other key regulatory initiatives

The FCA’s webpage on D&I also provides links with other areas of the FCA’s regulatory work that are linked to DE&I including in relation to:

Next steps

Responses to FCA CP23/20 are due by 18 December 2023. Interested stakeholders can sign up to an FCA webinar on 30 October 2023 to hear about the proposals. Responses to PRA CP18/23 are also due by 18 December 2023.  The FCA states that a policy statement will follow in 2024.  The proposed implementation date for the FCA changes is 12 months following the publication of the future FCA policy statement. We are closely following developments in relation to D&I for the financial services sector so please do get in touch with the contacts listed to the right of this article to discuss any questions you have on FCA CP23/20 and PRA CP18/23.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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