Regulators push diversity and inclusion proposals in financial services

Financial regulators have released consultation papers outlining strategies to advance diversity and inclusion within regulated financial services, with the aim of promoting healthy work cultures, combating groupthink and unlocking talent.

Developed by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), the measures seek to strengthen the safety and stability of firms while enhancing understanding of diverse consumer needs. Both regulators reiterated that a more diverse and inclusive environment within regulated financial services can improve internal governance, decision-making and risk management.

The proposals also include new rules and guidance that emphasize that misconduct, including bullying and sexual harassment, poses a threat to a healthy firm culture. This guidance is designed to enable companies to take decisive and appropriate action against employees who engage in such behavior.

DE&I proposal for firms

Government-led efforts and voluntary initiatives have already made progress in promoting diversity and inclusion. Key projects such as the Treasury’s Women in Finance Charter, the Parker Review and the FTSE Women Leaders Review are part of this progress, the regulator said.

While diversity and inclusion are societal concerns, the FCA and PRA recognize the role of regulators when these aspects align with their objectives. Their proposals aim to set flexible and proportionate minimum standards, raising expectations primarily for larger companies. The requirements for firms outlined in the proposals include:

• Creating a diversity and inclusion strategy that outlines how the company will meet its objectives and goals.
• Collecting, reporting and disclosing data related to specific characteristics.
• Establishing goals to address underrepresentation.

Regulators pointed out that flexibility is at the core of these proposals. Most of these requirements, such as target setting, regulatory reporting and disclosure, apply primarily to larger companies.

According to the FCA and PRA, the primary aim of the proposed rules is to translate increased diversity and inclusion within companies into better internal governance, decision making and risk management. This advancement aims to strengthen the safety and stability of firms, protect policyholders, and ensure better outcomes for both markets and consumers.

The consultation period remains open until December 18, 2023, during which the regulator invites comments on the proposed approach. Feedback received will inform the development of final rules scheduled for publication in 2024.

“UK financial services has long been a magnet for the best talent globally. Nikhil Rathi, chief executive of the FCA, said increasing levels of diversity within companies could help attract and unlock talent, thereby supporting the sector’s international competitiveness.

“Diversity and inclusion play an important role in avoiding groupthink within firms. Firms where a comprehensive approach is welcomed and encouraged will better manage their risks, furthering the safety and soundness objective of the PRA. Sam Woods, chief executive of the PRA, said stronger diversity and inclusivity should make companies more competitive by enabling them to attract a wider pool of talent.

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