On 25 September 2023, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) published consultations setting out their proposals to introduce a new regulatory framework on diversity and inclusion (D&I) in the financial sector. The FCA’s consultation paper, CP23/20, is on D&I in the financial sector – ‘working together to drive change’, and the PRA’s consultation is CP18/23 on D&I in PRA-regulated firms.

The FCA’s proposals in CP23/20

In CP23/20, the FCA proposes a framework which would establish minimum standards and give firms a better understanding of what is expected of them in relation to D&I from a regulatory standpoint. The proposed framework is also intended to help ensure greater consistency and transparency across the sector on firms’ approaches to D&I, and to support the objectives of the FCA’s Consumer Duty as well as its D&I priorities.

CP23/20 sets out proposals to:

  • Better integrate non-financial misconduct considerations into staff fitness and propriety assessments, Conduct Rules and the suitability criteria for firms to operate in the financial sector (Threshold Conditions).

It also proposes to require certain firms to:

  • Report their average number of employees to the FCA on an annual basis.
  • Collect, report and disclose certain D&I data.
  • Establish, implement and maintain a D&I strategy.
  • Determine and set appropriate diversity targets.
  • Recognise a lack of D&I as a non-financial risk.

The proposals would apply differently to firms depending on their number of employees, their categorisation under the Senior Managers and Certification Regime and whether they are dual-regulated. To reduce regulatory burden, smaller firms with fewer than 251 employees would be exempt from many of the requirements.

The deadline for feedback to CP23/20 is 18 December 2023.

The FCA will review the feedback and develop final regulatory requirements for publication in a Policy Statement in 2024. It proposes that the implementation date for changes would be 12 months after publication of the Policy Statement, in order to give firms time to prepare.

The PRA’s proposals in CP18/23

In CP18/23, the PRA proposes rules and expectations aimed at improving D&I in PRA-regulated firms, which can support better firm governance and decision-making and thereby advance the PRA’s objectives. The proposals, developed in parallel with the FCA, build on the ideas discussed in the regulators’ joint discussion paper DP2/21: Diversity and inclusion in the financial sector – working together to drive change, which was published by the PRA, the FCA and the Bank of England in July 2021.

The proposals in CP18/23 are informed by many of the suggestions made by the respondents to DP2/21, with the PRA noting that as there is no single means of improving D&I, firms need to take a holistic approach. On that basis, the measures set out in CP18/23 are intended to recognise that developing and maintaining a diverse and inclusive culture requires organisation-wide commitment.

CP18/23 includes chapters setting out proposed rules relating to:

  • Firm-wide D&I strategies.
  • The setting of diversity targets by the largest firms.
  • Board governance.
  • Individual accountability for D&I.
  • Monitoring D&I.
  • Regulatory reporting in relation to D&I data.
  • Disclosure of information on targets for the largest firms.

Like the FCA’s consultation, CP18/23 closes on 18 December 2023.

For further updates on regulatory developments in the ESG space please visit our Financial Services Regulatory Developments in ESG hub.