On Monday, the FCA and PRA published the consultation, CP23/20 on Diversity and Inclusion (“D&I”), to the financial sector. This is a topic that has been much discussed in FCA speeches in recent years and was also the subject of a Discussion Paper, DP21/2, published in July 2021. Some of the policy ideas in that paper have been taken forward into this new consultation, whilst others have not.
As well as clarifying and strengthening the FCA’s expectations around non-financial misconduct, which applies to all firms across the financial sector, the proposals will require large financial firms (those with more than 250 employees) to implement and maintain D&I strategies, and report representation on certain characteristics, such as disability status and ethnicity.
What are the proposals?
Non-financial conduct: the proposals, which will apply to all Financial Services and Markets Act (“FSMA”) firms with a Part IV permission, relate to three main areas of FCA rules:
- The Conduct Rules (COCON): currently restricted to regulated activities and certain kinds of misconduct that could have serious effects, the scope of COCON will be expanded to make clear that it covers serious instances of bullying, harassment and similar behaviour towards fellow employees and contractors. Guidance will be added on the types of behaviour that may breach the FCA’s Conduct Rules, as well as examples that are out of scope because they purely relate to an individual’s personal life.
- Fit and Proper assessments (FIT): FIT currently provides guidance on how firms should assess honesty, integrity and reputation when performing Fit and Proper assessments on Senior Management Functions (“SMFs”) and certification staff. Expanded guidance will explain that bullying and similar misconduct in the workplace is relevant to this assessment, and that similarly serious behaviour in an individual’s personal or private life is also relevant. Examples will be given of serious non-financial misconduct, such as sexual or racially motivated offences. It should be noted that the expanded guidance on FIT is also carried over to the requirements on Regulatory References (SYSC 22) – these are a very important aspect to the FCA’s objective of improving behaviour across the industry.
- Suitability guidance on Threshold Conditions (COND): the assessment of the Suitability Threshold Condition is particularly relevant for firms applying for authorisation but is also a standard that must be maintained as a regulated firm. It is assessed on an aggregated basis across the firm, including any actions the firm has taken to deal with past misconduct. The guidance supporting the assessment of Suitability will be expanded along similar grounds to COCON and FIT.
Proposed new reporting obligations
All firms will be required to report, on an annual basis, their number of employees – the data collected establishing the scope of the new D&I strategy and disclosure requirements, as follows:
D&I strategy (SYSC 29.2): firms with more than 250 employees will be required to develop an “evidence-based” D&I strategy with at least the following elements:
- The firm’s D&I objectives and goals;
- A plan for measuring objectives and progress towards achieving these;
- A summary of arrangements in place to identify and manage any obstacles to meeting objectives; and
- Ways to ensure adequate knowledge of the D&I strategy across all staff.
Data reporting on D&I (SYSC 29): see here for the draft regulatory return. This includes:
Targets: demographic characteristics for which the firm has set, and progress made on each target over time.
Mandatory demographic characteristics:
- Age
- Sex or gender
- Disability or long-term health condition
- Ethnicity
- Religion
- Sexual orientation
Voluntary demographic characteristics:
- Both sex and gender
- Gender identity
- Socio-economic background
- Parental responsibilities
- Carer responsibilities
When can firms expect this to be implemented?
The FCA expects to publish the final rules in 2024. From there, it will then be 12 months before the first regulatory reporting window opens, with firms required to report data on a comply or explain basis. After a further 12 months, firms will then report on a mandatory basis. The Consultation closes on 18 December 2023.
Next steps
Firms with more than 250 employees (plus expanding firms who may exceed this threshold in the next few years) will want to start looking at how they will capture the required data, including addressing any privacy concerns. All regulated firms should already be considering the implications of non-financial misconduct in their assessment of staff and related areas.
