The Financial Conduct Authority (“FCA”) and Prudential Regulation Authority (“PRA”) (together, the “Regulators”) have issued consultation papers setting out draft rules to implement diversity and inclusion (“D&I”) reporting and disclosure requirements, amongst other things. The Regulators have collaborated on the draft rules to ensure consistent application to dual regulated firms.
Summary of proposals
The Regulators propose to require certain regulated firms to:
- report their average number of employees 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; and
- embed D&I as a non-financial risk in staff fitness and propriety assessments, conduct rules and governance structures, amongst other things.
The rules will be finalised in 2024 and reporting obligations will begin from twelve months after the publication of the final rules. The reporting window will be a period of three months from the reporting reference date. For example, if the final rules were published on 1 March 2024, the first reporting reference date would be 1 March 2025 and firms would have until 2 June 2025 to report their D&I data to the Regulators.
Why are the Regulators consulting on D&I?
For those who have questioned whether diversity and inclusion is a legitimate policy matter for financial Regulators, the FCA has stated the following: “[w]e have been clear that diversity and inclusion are regulatory concerns…We consider that greater diversity and more inclusion can improve outcomes for consumers and markets by reducing groupthink, supporting healthy work cultures, unlocking diverse talent and improving understanding of and provision for diverse consumer needs.” The PRA has concluded that 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.”
Who is in scope of the proposed rules and how do they apply to UK based employees of overseas firms?
- The proposals apply to firms with a Part 4A FSMA permission (banks, insurers, and funds) (“FSMA Firms”). The full set of proposals will apply to the larger firms (those with over 250 employees) (“Large FSMA Firms”), while smaller firms (with 250 or fewer employees) (“Small FSMA Firms”) are subject to a less onerous regulatory regime.
- The proposals apply principally (with limited exclusions) only to employees that carry out their activities predominantly in the UK. For overseas firms (e.g. non-UK headquartered firms with a branch or subsidiary in the UK), the proposals apply only to activities of that branch or subsidiary that are carried out from “an establishment in the UK”.
- Non-part 4A FSMA firms (e.g. credit rating agencies, certain payment services institutions and certain e-money firms) are out of scope of these requirements. The FCA has stated that it may consult on equivalent rules for these firms at a later date. For now, the FCA provides that it will “encourage firms to consider whether voluntarily adopting this new framework may be beneficial”.
- Certain proposals also apply to dual-regulated (PRA and FCA) CRR and Solvency II firms (principally banks and insurers) of any size.
What rules have been proposed and how do they apply to in-scope firms?
|Summary of Policy
Fitness and Propriety
Authorisation/Licencing in the UK
|All FSMA Firms
|Data Reporting: average employee numbers
|All FSMA Firms (excluding Limited Scope SM&CR firms)
|Dual regulated (PRA and FCA) CRR and Solvency II firms (principally banks and insurers) of any size and Large FSMA Firms (excluding Limited Scope SM&CR firms)
Large FSMA Firms
|Risk and Governance
What information must Large FSMA Firms report on their D&I
Large FSMA Firms will publish on an annual basis their targets along with progress toward achieving them with the following data broken down at each level of board, leadership, and general employees:
- demographic breakdown for targets (and inclusion targets, if any);
- percentage progress achieved;
- year target was set;
- anticipated year of achievement;
- firm's current level of representation of each target (%); and
- rationale for targets.
What information must Large FSMA Firms report on the demographic breakdown of their workforce?
The FCA and PRA expect Large FSMA Firms to deliver an annual aggregated disclosure report based on the data that firms report to the FCA covering the following metrics (at board, senior leadership and employee levels):
|1. Sex and Gender
2. Sex or Gender (firms are required to report on either Sex or Gender. Firms may choose to report on both Sex and Gender on a voluntary basis.)
|2. Gender identity
|3. Disability or long term health condition(s)
|3. Socio-economic background
|4. Parental responsibilities
|5. Carer responsibilities
|6. Sexual Orientation
Employees can choose (or indicate that they prefer) not to provide information on any of the above categories.
On inclusion, the Regulators propose that Large FSMA Firms report annually on the following measures based on whether employees consider:
- They are safe to speak up if they observe any inappropriate behaviour or misconduct;
- They are safe to express disagreement with or challenge the dominant opinion or decision without fear of negative consequences;
- Their contributions are valued and meaningfully considered;
- They are subject to treatment (for example actions or remarks) that had made them feel insulted or badly treated because of their personal characteristics;
- They are safe to make an honest mistake; and
- That their manager cultivates an inclusive environment at work.
This data should be reported on a five-point scale of strongly agree to strongly disagree, including a neutral option.
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