At a time when the value of diversity and inclusion (D&I) is recognised as fundamental to business success, the Financial Conduct Authority (FCA) is taking proactive steps to ensure that UK financial services organisations of all sizes foster inclusive and equitable work environments.

Just this month, a BlackRock study of the MSCI World index has found that companies with more balanced gender workforces outperformed their least-balanced peers by as much as 2 percentage points annually between 2013 and 2022. This higher return on assets remained consistent across countries and sectors, particularly in companies where gender parity was strongest in revenue-producing, engineering and top-paying roles.

The need for FCA intervention is clear: just 19% of C-suite positions in banking, capital markets and payments are held by women, according to analysis by Deloitte. Meanwhile, more than 100 of the FTSE250 either have no ethnic minority representation on their boards or did not provide data, according to the latest Parker Review, suggesting that many financial services organisations are failing to turn the rhetoric into reality. 

It means that diversity and inclusion are no longer simply issues of business success, they are also regulatory concerns. That is why, together with the Prudential Regulation Authority (PRA), the FCA has published proposals to support progress on improving diversity in the wider financial services sector. 

Specifically, the regulator is clarifying and strengthening its expectations around non-financial misconduct, which will apply to firms large and small across the financial services sector. 

It also proposes that the largest financial firms already required to publish their gender pay gaps expand their DE&I reporting to include representation on certain characteristics, for example disability status and ethnicity. The threshold for larger businesses has been set at those with more than 250 employees. 

D&I strategies for larger businesses

Respondents to previous discussion papers have mostly supported this approach – although concerns have been raised, particularly regarding the impact on those at the lower end of the size spectrum. In addition, those businesses heavily reliant on outsourcing might be considered large based on other parameters such as revenue or balance sheet size, but would not be caught by the approach. 

The PRA has also released a diversity and inclusion consultation that will overlap with FCA-regulated firms that are banks or insurers under CCR or Solvency II regimes. This risks being unhelpful as there is the risk of differences in approach and potential conflict due to language or ambiguity, especially if one regulator goes further with the proposals than the other. 

A central element of the proposals is the requirement for larger businesses to implement a comprehensive D&I strategy. This should encompass the firm’s D&I objectives and goals, a comprehensive plan for achieving them and a system for measuring progress. It should also outline the arrangements for identifying and managing any obstacles that may hinder the attainment of these objectives and goals. 

Strategies should be evidence-based, supported by new regulatory reporting and disclosure and include mandatory elements, with oversight from the business’s board, reflecting the paramount importance of diversity and inclusion at the highest levels of leadership.

The proposals recommend setting targets to address under-representation at various levels within the organisation, including the board, senior leadership and the broader employee population. These targets aim to rectify disparities and foster inclusivity by reflecting the diverse society in which we live. 

The FCA is not at present looking to mandate which demographic characteristics the targets must cover or the nature of those targets. Instead, the proposals provide firms with flexibility in respect of the way they go about setting inclusion targets. Rather than dictating specific demographic characteristics, businesses are encouraged to determine their own targets, considering their existing diversity profile, D&I strategy and operational context. 

This approach provides businesses with the opportunity to create tailored strategies that reflect their commitment to fostering D&I. Proportionality is also needed in smaller less resourced firms with lower headcounts. However, it does increase the risk of businesses simply paying lip service to the proposals and consequently failing to set meaningful targets.

Regulatory reporting

Firms will be required to collect and report annually across a range of D&I-relevant data. These metrics would include mandatory demographic characteristics such as age, ethnicity, religion, disability or long-term health condition(s), and sexual orientation. 

Additionally, firms will be required to report either on sex or gender, with the option to report on both voluntarily. Responses to date suggest that firms may push back on the scope of data required. Other voluntary metrics cover parental responsibilities, gender identity and carer responsibilities, along with socio-economic background. 

The voluntary nature of reporting on certain demographic characteristics is rooted in the findings of a 2021 pilot data survey, which revealed that less than 50% of large firms (those with 251 or more employees) currently collect data on parental or carer responsibilities, gender identity or socioeconomic background. 

It is anticipated that, in time, an increasing number of firms will voluntarily report data on these metrics. In future, the FCA may consider making such disclosures mandatory, but recognise that this would require well-developed data collection systems and employees feeling comfortable to share the data. 

Taking a stand on non-financial misconduct

The consultation also includes proposals explicitly aimed at incorporating non-financial misconduct into several regulatory domains, including the Conduct Rules, Fit and Proper assessments and Threshold Conditions. Within this framework, adjustments to the Handbook will designate non-financial misconduct as a category of misconduct rather than an additional principle.

Non-financial misconduct, exemplified by behaviours such as bullying and harassment, is acknowledged as having the potential to have a detrimental impact on a firm’s organisational culture, trust levels and diversity of thought. Such misconduct can also discourage employees from voicing concerns, potentially leading to regulatory infractions, market integrity challenges and harm to consumers. 

The regulatory focus remains steadfastly fixed on addressing significant instances of misconduct that pose a substantial threat to statutory objectives, and enforcement actions – including prohibitions for individuals – are outlined within the proposal. 

These proposals represent a significant step forward in addressing non-financial misconduct and championing D&I within organisations. But there are many questions to consider, not least whether the proposals go far enough, whether they are fair and proportionate and how to ensure that they drive real change and foster inclusivity in a meaningful way. These are important questions that must be addressed to create a more equitable and diverse business landscape.

Reuben Wales is ICAEW’s Head of Financial Services. To find out more about ICAEW’s Financial Services Faculty and to become a member, visit the faculty’s dedicated hub.

• The FCA consultation will close on 18 December, with final proposals expected to be implemented in the new year.