City regulators have abandoned the idea of introducing new diversity and inclusion rules for financial firms because they want to avoid imposing extra regulatory burdens and costs, in the latest sign of a rowing back on efforts to help underrepresented groups.

In 2023, the Financial Conduct Authority (FCA) and the Bank of England’s regulatory arm the Prudential Regulation Authority (PRA) consulted in parallel on proposed rules and expectations aimed at improving diversity and inclusion in regulated firms. But in a joint statement issued earlier this month, the FCA and PRA said: “In light of the broad range of feedback received, expected legislative developments and to avoid additional burdens on firms at this time, the FCA and PRA have no plans to take the work further.”

Voluntary industry initiatives

The PRA and the FCA said they would instead support voluntary industry initiatives aimed at boosting diversity and inclusion in the financial sector. The move coincides with a push by the UK government to reduce regulation to help stimulate economic growth.

In a letter to Treasury Committee Chair Dame Meg Hillier MP, FCA Chief Executive Nikhil Rathi accepted that diversity and inclusion within the firms regulated by the FCA can deliver improved internal governance, decision-making and risk management. “It can also support the competitiveness of UK financial services over the medium to long term, not least by ensuring firms can access the widest possible pool of talent,” the letter said.

However, the letter also said the regulator did not want to add to the burden and cost of regulation against a backdrop of significant regulatory and legislative activity across areas including employment rights, gender action plans and disability and ethnicity pay gap reporting.

Benefits of a wide range of perspectives

The background to the consultation paper, published on 23 September 2023, was the idea that diverse views, combined with inclusion, support the ability of staff to challenge, speak up, and raise concerns, the PRA continued. “A wider range of perspectives is likely to lead to a better understanding of the risks facing a firm, and more effective and prudent decision-making.”

The current move comes after an inquiry into sexism and misogyny in the financial services sector, published in March 2024 by the Treasury Committee, found that “not much” had changed since a previous report on the issue was published in 2018. 

D&I still a tick box exercise

The Sexism in the City report found that many firms still treat diversity and inclusion as a ‘tick box’ exercise rather than a core business priority, despite clear evidence that diverse firms achieve better results. Meanwhile, there have been only incremental improvements in the proportion of women holding senior roles in financial services firms, and some sectors have seen no improvement at all. 

Similarly, there has been only a small reduction in the average gender pay gap in financial services, which remains the largest gender pay gap of any sector in the UK economy. In the UK more than 1.1 million are employed in financial services directly and more than 1.3 million are employed in related professional services.

The Treasury Committee has previously expressed its concerns that City regulators could require financial firms to collect and report diversity and inclusion data, and set targets, which it said “well-run firms” should already be doing.