An overview of the FCA and PRA Consultation Papers
The Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) have recently published consultation papers setting out proposals to improve diversity and inclusion in the Financial Services (FS) sector. The FCA have made it clear that diversity and inclusion (D&I) is essential for a healthy firm culture. A healthy culture in turn enables firms to deliver better outcomes for consumers and markets by delivering consumer protection and market integrity. The FCA have been striving for an inclusive industry with progression and a value for diversity for years (both within their own organisation and across the sector). They have acknowledged that progress towards a diverse and inclusive industry has been made. However, whilst most firms are publicly committed to change, there is still much to be done.
The FCA and PRA hope that their new proposals will accelerate progress on D&I in FS and will prompt firms to take more action against non-financial misconduct. From the consultation paper it's clear that they hope to achieve three principal aims as a result:
- to reduce groupthink,
- to attract a wider pool of talent, and
- to encourage a healthy work culture by improving the safety and soundness of firms.
The Consultation Papers
The FCA's consultation paper sets out proposals to increase the pace of change on D&I in FS whilst the PRA's paper sets out their proposed rules and expectations aimed at improving D&I outcomes in regulated firms. The FCA and PRA collectively intend to embed diversity and inclusion in firm culture through the implementation of strategy and ensuring disclosure. Through their monitoring, the regulators will produce an industry-wide benchmarking report using the collected data.
Some of the FCA's proposals will apply to all regulated firms, but large firms with 251 or more employees will have additional measures. Specifically, all firms will need to collect and report data across a range of demographic characteristics. However, large firms will also need to develop diversity and inclusion strategies setting out and measuring objectives and goals; set targets for underrepresentation to be disclosed publicly; and publicly disclose D&I data. The FCA will introduce guidance for firms detailing that matters relating to D&I are non-financial risks and will be treated appropriately under a firm's governance structures.
The PRA proposes that firms should have a firm-wide D&I strategy detailing the firm's core values, the intended culture of the firm, clear objectives, goals and measurements for improving D&I. They further propose that firms should hold diversity targets identifying underrepresentation; a published strategy promoting D&I on the board; and have internal monitoring of D&I. The PRA propose that firms should hold statements reflecting responsibility allocated to senior management functions, making firms and individuals accountable.
The PRA additionally stipulates that large firms must disclose their targets, the firm's demographic diversity and report particular D&I data. Altogether, this will increase transparency and scrutiny on firms within the FS sector, but especially large firms with additional reporting requirements.
Failure to promote D&I could result in damage to working relationships, legal action, discrimination, and reputational damage. However, workplaces that reflect positive D&I will benefit from a wide talent pool of potential candidates; a motivated and productive workforce; lower employee turnover; a larger pool of insights, perspectives and experiences; and an enhanced reputation.
FCA Chief Executive Nikhil Rathi commented that "UK financial services has long been a magnet for best-in-class talent globally. Increasing levels of diversity within firms can help attract and unlock talent, supporting the sector's international competitiveness".
The FCA and PRA intend for their proposals to improve diversity and inclusion for board and senior management to support discussion and debate on important risk issues which reflect a range of viewpoints and experiences. Their proposals will also make firms more inclusive and diverse, which allows individuals to speak up and raise concerns on issues relevant to the firm's business and risk profile. Most importantly, the proposals make firms and individuals accountable to provide incentives and make progress.
Non-Financial Misconduct
Non-financial misconduct has a significant impact within the financial sector and it can erode trust, affect workplace culture and increase risk of legal claims. Therefore, addressing these issues is not only a matter of ethics, but also a business imperative for financial institutions to thrive in a competitive and regulated environment.
The FCA are strengthening their fitness and propriety framework to suppress non-financial misconduct cases. The FCA propose that non-financial misconduct will be explicitly contained within conduct rules, fit and proper assessments, and suitability guidance. It has been made clear that non-financial misconduct is not an additional principle, but it is an issue that is imperative to address. Bullying and harassment can lead to reluctance to speak up and raise concerns, which can ultimately develop into regulatory breaches and negative impacts on market integrity.
The FCA also propose to add guidance on how non-financial misconduct should be incorporated into regulatory references. Further guidance and regulation on non-financial misconduct will combat the current pitfalls and promote a healthy culture within the workplace.
Next Steps
These initiatives reflect the regulators' commitment to creating diverse and inclusive workplaces within the financial sector and reducing risks associated with non-financial misconduct. The proposals focus on transparency, reporting and accountability to drive positive change within this industry. This will mean a change of dynamics and culture within firms in the FS sector.
The consultation papers are currently open for comments until 18 December 2023, after which the FCA and PRA will then review this feedback and develop their final regulatory rules and requirements in 2024.
The FCA and PRA propose to bring the final rules into force in 2025, giving the FS sector one year to implement the changes. It is therefore critical to stay informed of these developments to ensure compliance within the financial industry. A failure to do so may lead to serious regulatory consequences.
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