The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have recently published consultation papers setting out proposals to promote diversity and inclusion (D&I) in the financial services sector. The papers follow on from the joint discussion paper in July 2021 when the regulators made it clear that firms should consider D&I.  This was followed by a review paper by the FCA in December 2022.  Our Regulation Tomorrow blog on the consultation papers can be found here.

The FCA make it clear that when introducing the new framework, they are also required to have regard to their Public Sector Equality Duty under the Equalities Act 2010.  In addition to this, firms of all descriptions and employee headcounts should continue to be mindful of the broader obligations that already exist under the Equality Act 2010.

Non-financial misconduct:  The FCA proposes that all firms with a Part 4A permission under the Financial Services and Markets Act 2000 (FSMA) will be required to consider non-financial misconduct within the conduct rules, the fit and proper assessments and suitability guidance on the Threshold Conditions.  The types of conduct in the Conduct Rules will include serious instances of bullying or harassment and guidance will be given on the type of conduct which will fall within these rules.  The test for determining fitness and propriety will clearly include non-financial misconduct such as sexual or racially motivated offences and will include such behaviour in a person’s personal or private life.  These matters which relate to an individual’s private life may be excluded for the purposes of the Conduct Rules but will be relevant for an assessment of fitness and propriety.   This causes a number of issues from an employment law perspective.  For example, to what extent can an employer investigate an individual’s conduct outside the workplace?  In addition, what is the level of investigation that the employer is required to enter into if the actions of the individual questionably affect the individual’s honesty, integrity or reputation, and, as a result finding that someone is not fit and proper will affect their ability to work in the regulated sector?  The guidance to be provided to firms will be important.

D&I strategies: A key component of the FCA’s and PRA’s proposals is a requirement for certain firms to have in place a D&I strategy (D&I policy).   Many firms already have D&I strategies in place, but the proposal is that dual regulated firms (Capital Requirements Regulation and Solvency II firms of any size and all firms with a Part 4A permission who have 251 or more employees (excluding so called ‘Limited Scope’ firms under the Senior Managers and Certification Regime) must have such a strategy in place. The strategy must include as a minimum D&I objectives and goals; a plan for meeting these and measuring progress; a summary of arrangements to identify and manage any obstacles; and ways to ensure staff have adequate knowledge and understand the strategy. Firms covered by the PRA would also require a “strategy to promote diversity and inclusion on the board”.  The firm’s board would be responsible for the maintenance and oversight of the firm’s D&I strategy. 

Under the Equality Act 2010, an employer will be liable for acts of discrimination (including harassment) by its workers unless it can show that it took “all reasonable steps” to prevent the discrimination.  The steps that an employer should take to reduce the risk of liability for any bullying or harassment or acts of discrimination includes having in place robust policies on equality, diversity and inclusion; ensuring that these policies are implemented in practice and providing effective and ongoing training.  So, while employers may not have to have in place D&I strategies in the form suggested by the FCA and PRA proposals, all firms should have in place a form of policy and training on D&I.  It should also be noted that the Worker Protection (Amendment of Equality Act 2010) Act 2023 received Royal Assent on 26 October 2023.    This Act amends the Equality Act 2010 to introduce a duty on employers to take reasonable steps to prevent sexual harassment of their employees and gives employment tribunals the power to uplift sexual harassment compensation by up to 25% where an employer is found to have breached the new duty to prevent sexual harassment.  The Act will come into force on 26 October 2024 and means that all firms, regardless of their size and the regulatory requirements in place will have a positive duty to take these reasonable steps.

Setting targets:  The FCA proposes that firms would be required to set targets to address underrepresentation at both board and firm-wide levels. The FCA will not mandate which demographic characteristics the targets must cover nor what those targets should be and a firm will be required to publicly disclose their targets.  Clearly employers can set targets which they hope to achieve with respect to those who are underrepresented.  However, in doing so an employer must ensure that they do not discriminate against those who do not have the relevant protected characteristic.  The Equality Act 2010 contains certain provisions where an employer can take lawful “positive action” meaning that the employer can take certain actions to enable or encourage those with the protected characteristic to overcome or minimise the disadvantage.   Any such action taken must also be proportionate. This will be an important consideration for firms in seeking to meet their targets.

Reporting requirements:  The FCA considers that data is important in understanding the areas of underrepresentation and setting appropriate targets and monitoring progress.  However, there are challenges in collecting good quality data.  The proposal is that large firms will be required to report annually on a range of demographic characteristics including age, ethnicity, sex or gender, religion, disability or long-term health conditions and sexual orientation.  Firms may also choose voluntarily to report on both sex and gender, gender identity, parental responsibilities, carer responsibilities, and socio-economic background.  Currently large firms are required to report on the gender pay gap, but the government decided not to extend this to other protected characteristics such as ethnicity, holding that instead ethnicity pay gap reporting should be voluntary.  Firms may already seek to collect data in this area for monitoring purposes, but employees cannot be forced to respond to such requests and should be allowed to specify a preference not to reply.  Another issue in this area is the taxonomy that should be applied to the different characteristics.

Next steps

Firms should be considering their existing policies and procedures in place and how these may need to be amended considering these proposals.  However, they should also make sure that notwithstanding the regulatory requirements they comply with their employment law obligations with regard to equality, diversity and inclusion.  For further information on the FCA and PRA proposals please see our Diversity, Equality and Inclusion (DE&I) (Financial services and regulation) Hub