FCA & PRA say "goodbye" to diversity and inclusion reforms but "see you later" to non-financial misconduct

In their recent letters to the Chair of the Treasury Select Committee the PRA and FCA abandoned their proposed diversity and inclusion ("D&I") reforms. The FCA has also delayed the introduction of its rules regarding non-financial misconduct ("NFM") until June this year.

What was proposed?

In 2023, the PRA and FCA each published consultation papers (CP18/23 and CP23/20 respectively) on D&I in financial services. The FCA's consultation paper also included proposals in relation to NFM.

D&I proposals

The proposals included requiring firms to develop an evidence-based D&I strategy containing as a minimum:

• the firm’s D&I objectives;
• a plan for meeting those objectives and measuring progress;
• a summary of the arrangements in place to identify barriers to meeting the objectives; and
• ways to ensure staff have adequate knowledge of the D&I strategy.

The proposals also required firms to set and publish diversity targets at board level and throughout the organisation, and report on progress on an annual basis.

NFM proposals

You can listen to our analysis of the proposed FCA reforms on NFM here. In summary:

• Since the onset of the MeToo movement, the direction of travel in the FCA's approach has been to regard NFM as misconduct and therefore falling within the scope of its regulatory remit.
• However, there is no express reference to non-financial misconduct (or its meaning) in the FCA rulebook, and until now there has been limited guidance on what it means in practice.
• The FCA sought to bridge this gap by publishing a consultation paper alongside proposed rules, which would amend the FCA handbook to expressly include NFM considerations as part of the regulatory standards applying to individuals and firms.
• The final proposals were initially scheduled to be published by the end of 2024.

What is the current position?

Diversity and inclusion

Both the PRA and FCA confirmed that they were not taking their D&I plans forward to "avoid duplication and unnecessary costs".

In making this decision, each regulator took into account feedback from respondents to the consultation papers, alongside the issues raised by the Treasury Committee in its 'Sexism in the City' Report. In particular, the Treasury Committee was unconvinced of the potential effectiveness of the reforms, noting its concerns that they would be treated by firms as a box ticking exercise rather than acting as a catalyst for culture change, and would be costly to implement.

In addition, each regulator acknowledged the Government's proposed legislative reforms, referring in particular to gender action plans and disability and ethnicity pay gap reporting.

The reference to "unnecessary costs" chimes with the Government's focus on driving growth, and for regulators to support that by adopting a proportionate approach to regulation (see for example, the Chancellor's letter to the FCA CEO).

Despite abandoning the proposed reforms, each regulator remains supportive of the benefits that D&I can deliver, and of the voluntary industry initiatives that are already in place. In addition, the PRA indicated that it may revisit these reforms following the implementation of the Government's legislative agenda.

Non-financial misconduct

In contrast to the D&I reforms outlined above, the FCA's proposals in relation to NFM are being delayed rather than abandoned, with the FCA saying in its letter that "we continue to prioritise our work to tackle non-financial misconduct". The echoes a recent speech from the FCA's COO who emphasised the importance of regulated firm culture. She said that "one of the clearest warning signs of a failing culture is non-financial misconduct". Against this background it seems unlikely that the NFM proposals will be dropped completely.

However, given that the original NFM proposals pre-dated the General Election and the introduction of the Employment Rights Bill by the Labour Government, the FCA noted in its letter that any changes need to be "proportionate and aligned with planned legislation" and that the "legislative landscape has also changed since we consulted". The letter noted that the FCA would "set out next steps" by the "end of June" this year.

What impact does this have on employers?

• Many UK firms already have voluntary initiatives in place in relation to D&I, and the FCA and PRA remain supportive of those.
• While not specifically mentioned in either letter, it is notable that the rowing back on the D&I plans have taken place so shortly after the restrictions introduced on the promotion of DEI (diversity, equity and inclusion) initiatives in the US.
• While this removes a potential source of regulatory tension between the US and the UK and makes it easier from a regulatory perspective for firms with US and UK operations to align on approaches in this area, firms need to remain alert to the fact that the UK and US already operate in distinct legal and political environments.
• The delay in implementing the proposals relating to NFM does not necessarily signal any change of approach from the FCA on this issue. Therefore, firms should continue to strive for improvements in culture and creating an environment of psychological safety for employees by, for example, ensuring that effective processes are in place for staff to escalate concerns, training managers on responding to instances of NFM and educating staff on diversity and inclusion.