FCA, PRA and Bank of England Joint Discussion Paper on D&I

On 7 July 2021, the FCA, PRA and Bank of England ("Regulators") issued their Joint Discussion Paper seeking views on improving Diversity & Inclusion ("D&I") in the financial sector ("Discussion Paper").

The Regulators ultimately aim to produce minimum regulatory expectations (proportionate to a firm's size and complexity) and will take action when shortcomings arise, particularly where they impact on consumers and market outcomes. The Regulators also want to leverage the SMCR regime to forward this agenda.

The Discussion Paper highlights the importance of increased D&I in financial services and notes the aim of seeing this translate into safer and sounder firms with better internal governance and risk management, a more innovative industry, and financial products and services that meet the diverse needs of consumers. The Regulators recognise that the pace of reform requires acceleration - particularly given the rising prominence of race and gender equality and wider social justice on firms' agendas, further prompted by investors on ESG metrics.

The Regulators therefore expect meaningful steps to be taken to achieve greater representation at all levels, in particular at the Board and senior management levels. Representation, whilst historically focussed on gender, must now reflect all strands of diversity - both visible (eg gender, age and ethnicity) and non-visible (eg disability, sexual orientation and socio-economic background) and on an intersectional basis also, with the overarching objective of achieving diversity of thought.

1. Monitoring progress: data collection

Data is critical to understanding gaps, setting appropriate targets and monitoring progress. However, in the absence of reporting requirements and lack of real insight into the diversity of the financial sector, the Regulators are considering introducing regular reporting - most likely covering the protected characteristics under the Equality Act 2010 and socio-economic backgrounds of all levels of staff. Collecting this data is expected to advance the Regulators' evidence-based policymaking and enable them to monitor firms' progress towards stated targets.

This autumn, the Regulators plan to issue a one-off, voluntary pilot data survey to inform the development of a regular future collection and therefore to better understand, broadly, the levels of diversity in firms, the D&I data already held by firms and firms' strategies / plans to collect D&I data.

2. Potential policy initiatives

We outline below the general policy options suggested by the Regulators to effect D&I progress:

a. Tone from the top

• Leadership: Leaders should set a strategy and empower teams to develop and implement initiatives that deliver cultural change at all levels. Boards should monitor and challenge progress on D&I to satisfy themselves that decision-makers at all levels are reaping the benefits of diversity of thought.

• Governance: Boards should set a D&I strategy and hold management to account for promoting D&I and overseeing its progress.Boards themselves should ideally have diverse representation and this should be factored into recruitment and succession planning. Firms could consider setting targets to ensure diverse representation.

• Individual accountability: Make senior leaders directly accountable for D&I, including through the Senior Managers and Certification Regime (more on this below).

• Remuneration: Reflect performance on D&I metrics in variable remuneration awards. Ensure that the firm's remuneration policy makes clear that all types of remuneration (fixed and variable) do not give rise to discriminatory practice.

b. Firm-wide policies and practices

• Policies: Produce and publish a D&I policy on the firm's website which, as a minimum, promotes diversity on the Board.

• Progressing diverse representation: Consider how to progress diverse employees in terms of recruitment, promotion and succession planning.

• Targets: Consider setting targets for underrepresented groups in senior management positions, customer-facing roles and the firm as a whole.

• Training: Organise meaningful training sessions tailored to appropriate staff levels.

• Products and services that meet diverse customer needs: Ensure product governance considers the diverse needs of consumers, including consumers in vulnerable circumstances.

• Disclosure: Publicly disclose a selection of aggregated diversity data on senior management population and the employee population as a whole, together with their D&I policies. Consider including data on pay gaps (going beyond gender to include other characteristics).

• D&I audits: Consider carrying out internal D&I audits.

3. Possible measures under the SMCR

The Discussion Paper also looks at a number of ways in which the SMCR regime can be used to promote a D&I agenda.

i. Senior Management Function ("SMF") approval: The Regulators are considering whether to collect diversity data as part of SMF applications in order to scrutinise diversity within firms. Specifically, they would like to understand how firms considered the proposed appointment and how it will contribute to diversity. Where there are concerns that an appointment could worsen, or not address risks arising from lack of diversity and groupthink, the PRA/FCA would look to discuss this with firms.

ii. Fitness & propriety ("F&P")/Conduct Rules: The PRA/FCA are exploring whether adverse findings in relation to an individual's D&I conduct could affect future F&P and Conduct Rule breach assessments. The Discussion Paper suggests that the Regulators may consider developing guidance on the topic of what constitutes non-financial misconduct, including evidence of sexual harassment, bullying and discrimination on the basis of someone's protected characteristic. The guidance may also cover how failure to take reasonable steps to address these kinds of behaviour could result in a Conduct Rule breach. Guidance on this from the regulators would be very welcome given the difficulties many firms have with assessing non-financial misconduct within the existing parameters of the SMCR framework.  

iii. SMF 13 (Chair of the Nomination Committee): For firms with a Nominations Committee and a SMF 13, the PRA/FCA propose the SMF 13 would also be responsible for ensuring that the committee consider D&I in succession planning. Many firms and SMF 13s may already do this.

iv. SMF 12 (Chair of the Remuneration Committee): The Regulators believe that Remuneration Committees should have oversight of how obstacles that give rise to pay gaps and other adverse D&I outcomes are being managed in their firms. By extension the Chairs of these committees (SMF 12s) would also be responsible for ensuring that the committee adequately considers D&I to the extent relevant to its functions.

v. Dual regulated firms - PRs for culture (PR (I) and PR (H): The Regulators believe these PRs are an obvious point of accountability for D&I in relevant firms. They suggest that making the link between D&I being part of culture even clearer would clarify that these PRs encompass responsibility for the implementation and execution of the firm's D&I strategy. They consider this could be supplemented by specific actions in the Senior Managers' Statements of Responsibilities to ensure that accountability for D&I strategy is coherent and responsibility is not fragmented.

vi. Solo-regulated firms - responsibility for D&I: The FCA want to explore the express allocation of responsibility for elements of the D&I policies to Senior Managers, rather than including them in their general wider responsibilities (e.g. within the broader responsibilities of the SMF responsible for people policies).

4. Next steps

The Regulators welcome feedback by 30 September 2021. The PRA and FCA intend to consult on more detailed proposals in Q1 2022 and will follow this with a Policy Statement in Q3 2022. Given the different legal and supervisory frameworks for financial market infrastructure firms, the Bank of England will separately consider how to develop proposals to promote D&I for those firms. Finally, the FCA is also considering its approach to D&I in listed firms and intends to share more in the coming months.

5. Additional papers

The FCA and the PRA have also published papers analysing evidence of diversity in the workplace. The FCA paper sets out a review of academic research / other literature on the impact of D&I in the workplace, whilst the Bank of England uses a novel dataset constructed from regulatory information to study board and senior manager diversity in UK banks:

• FCA: Review of research literature that provides evidence of the impact of diversity and inclusion in the workplace -link

• PRA: Staff Working Paper No. 929 Gender, age and nationality diversity in UK banks -link (by way of reminder, and as made clear in the paper, working papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Any views expressed are solely those of the author(s) and so cannot be taken to represent those of the Bank of England or to state Bank of England policy).

We would encourage firms to engage with the regulators on this topic as they are interested in obtaining feedback before they consult on proposed regulatory changes next year. The deadline to provide feedback is the 30 September 2021.

We would be delighted to discuss these papers with you and your thoughts on their contents further.