The much-anticipated consultations by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) on a proposed diversity and inclusion (D&I) framework are now underway.
Both regulators have coordinated the approach to their respective consultations to ensure consistency for the financial services sector. The consultations are based on feedback received on the joint discussion paper published by the PRA, FCA and the Bank of England in 2021.
The PRA’s proposals
The PRA is seeking to advance its objectives of “safety and soundness” and “policyholder protection” by improving D&I in PRA-regulated firms. The PRA considers that improved D&I will reduce “groupthink” and support more effective decision-making and risk management.
The PRA’s proposals include the following:
Firms to implement and publish firm-wide D&I strategies, including a strategy on promoting D&I on the Board;
D&I responsibility to be allocated to the relevant Senior Manager Function and reflected in Statements of Responsibilities;
Monitoring D&I progress internally.
Further, the largest firms will be required to set their own diversity targets for the Board, senior leadership teams and all employees, where there is underrepresentation (including targets for women and ethnicity at a minimum). Certain D&I reporting obligations will also apply to such firms, requiring them to publicise their D&I targets, report certain D&I data against their own targets, report the diversity demographics of their firm, and the outcome of any D&I surveys conducted internally.
The FCA’s proposals
The consultation on D&I follows on from the FCA’s announcement in April 2022 about its three-year strategy to improve outcomes for consumers and markets, which included focusing on progressing D&I within financial services.
The FCA’s reasons for prioritising D&I as part of its regulatory framework include:
improving outcomes for consumers and markets by reducing “groupthink”;
supporting healthy work cultures (which the FCA expects to drive higher standards of conduct);
unlocking diverse talent; and
improving the understanding of and provision for diverse consumer needs.
As part of its proposals, the FCA is planning to introduce a new SYSC 29 (diversity & inclusion) in the Senior Manager Arrangement, Systems and Controls Sourcebook.
While all firms to which the new SYSC 29 applies will need to report their average number of employees annually, only larger firms with 251 or more employees will be required to comply with new additional requirements, including:
establishing, implementing and maintaining a D&I strategy;
collecting and reporting D&I data;
determining and setting D&I targets; and
recognising that a lack of D&I is a non-financial risk.
The FCA is not proposing to set D&I targets for firms, and so firms are expected to retain autonomy in determining targets based on their own requirements.
The Conduct Rules
In the consultation, the FCA maintains its current stance that the Conduct Rules do not apply to an individual’s personal or private life. There has been some confusion within the sector on the extent to which non-financial misconduct in an individual’s private or personal life also needs to be taken into account in terms of their professional life and, consequently, whether the Conduct Rules are engaged.
The FCA is proposing a new COCON 1.3 to clarify the scope of the rules and specifically incorporate non-financial misconduct into the current regulatory regime. Relevant factors to guide firms in determining whether the Conduct Rules apply include whether the conduct occurred in the firm’s office, involved clients, and/or was facilitated by the employee’s role in the firm. The FCA makes clear that serious instances of bullying, harassment and similar behaviour towards colleagues (including contractors) will engage the Conduct Rules.
The proposed new requirements will impact how firms in the financial services sector currently deal with non-financial misconduct issues when considering whether the Conduct Rules have been breached and/or assessing fitness and propriety (see below). The guidance will bring some clarity to firms when dealing with disciplinary matters involving non-financial misconduct. Still, there will certainly remain “grey areas” where firms will need to exercise individual judgement carefully in deciding whether any regulatory rules have been breached and/or if the individual remains fit and proper to carry out their role. It remains important for such decisions to be taken on a collective basis, with input from HR, compliance and legal teams throughout the process.
Fit and proper assessments
In determining fitness and propriety, misconduct within and outside the workplace can be relevant and the consultation makes clear that this position will be maintained by the FCA.
The FCA explains that bullying and similar misconduct within the work environment are relevant to the assessment of fitness and propriety that employers must conduct, as is similar behaviour in a personal or private life context. Further, the FCA is proposing to change its guidance to clarify that conduct that could damage public confidence is likely to mean that an individual is not fit and proper.
While helpful, these changes do not remove the need for firms to make careful and fully considered decisions as to whether misconduct in an individual’s personal life is relevant and sufficiently serious to warrant a negative fit and proper assessment. This can be a heavy burden given the potential for employment law claims in disputed cases and the likelihood of the FCA withdrawing approval, which will have a considerable knock-on impact on an employee’s future career.
In relation to the “Threshold Conditions”, which are the minimum conditions that authorised firms must comply with, the FCA is proposing to extend its guidance on the Suitability Threshold Condition by including:
offences relating to a person or group’s demographic characteristics (e.g. a racially-motivated offence); and
any court or tribunal judgments that the firm (or an individual connected with the firm) has engaged in discriminatory practices.
Awaiting the outcome
Both consultations are open until 18 December 2023.
The FCA is expecting to review the responses and publish a Policy Statement in 2024 detailing its new regulatory requirements on D&I. The new requirements are expected to come into force 12 months from publishing the Policy Statement. The final rules are likely to reflect most, if not all, of the proposals in the consultation documents. Therefore, it is important that affected employers prepare early for the upcoming changes. We will analyse the impact of the new rules once the Policy Statement becomes available.
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