SMCR View Flash Alert: FCA/PRA DEI Consultation Papers published today

We hope you’re all feeling energised after the summer and you still have that “back-to-school” buzz. We will be producing a more detailed note in due course, but we want to flag to you that the long awaited FCA Diversity, Equity and Inclusion Consultation Paper and PRA Diversity and Inclusion Consultation Paper have been published today…finally!

You will remember the original joint PRA and FCA Discussion Paper was published in July 2021. Some of proposals in this discussion paper have been taken forward, whilst others have not been. Perhaps one of the things proposed that will cause the biggest amount of concern (and future work) for firms are the reporting / public disclosure requirements. We will be looking at these in more detail.

Some initial highlights from the paper include:

1. Scope – not all the proposals will apply to all firms. Specifically, the FCA are clear that Limited Scope firms, for example, are intended to be excluded from certain policy proposals including data reporting and disclosures. Similarly regulated entities with less than 251 employees will also be excluded from certain policy proposals. We also note that credit rating agencies, payment services and e-money firms are out of scope of the proposals (to the extent they don’t have Part4A permissions) but the FCA has said they may consider voluntarily adopting the proposed framework…

2. Guidance on Non-Financial Misconduct (NFM) - this is something the industry has been waiting for and we weren’t always sure if we were going to get it. The paper sets out the FCA’s proposals regarding:

• Fitness & Propriety: Explaining that bullying and similar non-financial misconduct is relevant to fitness and propriety assessments and similarly serious behaviour in a person’s private life is also relevant.
• Giving examples of non-financial misconduct, such as sexually or racially motivated offences.
• Expanding the existing guidance on the Suitability Threshold Condition in COND to include offences relating to a person’s/group’s demographic characteristics, for example (FCA proposal).
• Clarifying expectations around the Conduct Rules to: (i) make clear it covers serious instances of bullying and harassment and similar behaviour; and (ii) add guidance on what types of behaviour might breach the conduct rules and what conduct is out of scope because it relates to an individual’s personal or private life.
• We note that the PRA also propose updating their relevant Supervisory Statements to clarify that they may consider established patterns of behaviour of an individual that would, or would be likely to, affect the firm’s safety and soundness, when considering whether they are F&P.

3. Data collection and disclosures/reporting – proposals (from both the FCA and PRA) that large firms collect and report/disclose data across a range of demographic characteristics. There are clearly potential challenges with collecting and reporting data of this nature and this is something our team will look at in more detail. We know that many of you will be focussed on this as this is potentially a huge undertaking for firms. There are also proposals that firms report on specific inclusion metrics.

4. Governance – guidance to large firms to make clear that D&I matters are to be considered as a non-financial risk and treated appropriately within the firm’s governance structures.

5. Firm strategy – relevant, in-scope firms are to develop an evidence-based D&I strategy to include: the firm’s D&I objectives and goals; a plan for meeting those objectives and goals and measuring progress; a summary of the arrangements in place to identify and manage any obstacles to meeting the objectives and goals; ways to ensure adequate knowledge of the D&I strategy amongst staff. The Board will be responsible for maintenance and oversight of the strategy.

6. Targets – the FCA and PRA would like to see relevant firms setting and reporting on targets to address underrepresentation within their firms. The FCA don’t propose to mandate which demographic characteristics the targets must cover nor what those targets should be. (Note that there are legal issues to be considered regarding targets.)

7. SMCR – whilst the FCA are not taking forward their proposals to create new rules around SMF applications, or to require an SMF to be responsible for D&I, the PRA have said that they will be clarifying in their Supervisory Statement that the scope of the PRA PRs for culture will include responsibility for the development and implementation of D&I strategies.

There are several concepts from the discussion paper that are not being taken forward by the FCA including: mandating training, making changes to remuneration rules, or regarding board recruitment, succession planning and talent pipelines. We note that the PRA are taking a slightly different approach in some of these areas and so for dual regulated firms reading across both will be important – e.g. the PRA are planning to clarify that when considering succession planning, upcoming appointments should also be considered in the context of diversity.

The FCA have said that it is looking to publish its final Policy Statement in 2024 with the rules coming into force 12 months from the Policy Statement’s publication date.

We will of course provide a more substantive update in due course, but if you’d like to discuss this with us then please let us know. We will be writing our own response to the FCA/PRA on this and would love to hear from you. Firms must respond by 18 December 2023 for both the PRA and FCA papers.