FCA consults on regulatory scrutiny of non-financial misconduct and DEI efforts - what should you be thinking about?

Last week, the Financial Conduct Authority (FCA) published the long-awaited consultation paper on diversity and inclusion in the financial sector. After hints in speeches, a discussion paper and pilot analysis, firms finally get a chance to see the FCA’s (potential) playbook on the topic. While these are (still!) early days, the headline point is that greater regulatory scrutiny regarding diversity, equity and inclusion is coming (with a particular focus on non-financial misconduct) – and vague pronouncements on the topic by firms (without supporting strategic initiatives, impact measurements and robust data collection) will not be enough to satisfy the FCA.

Some big points worth reflecting on:

Firstly, the scope. Certain minimum standards could apply to all FCA regulated firms with a part 4A permission – with the express aim of reducing non-financial misconduct (specifically discrimination and misconduct). Firms with under 251 people are not expected to have further obligations (save for an obligation to report employee numbers to the FCA annually).

And for larger firms? Firms over the 251-employee threshold would be required to develop an “evidence-based D&I strategy” and set diversity targets to address underrepresentation. While the FCA does not expect to mandate what the targets should cover or be, they do expect there to be informed decision making based on data collection. Further, there could be requirements for larger firms to annually collect and report data across a wide range of demographic characteristics and inclusion metrics.

Next, the overall goals. The FCA outlines four objectives: healthier firm cultures, reduced groupthink, unlocking new talent, and greater understanding of and provision for diverse consumer needs. Interestingly, the FCA does give us a sense of how they’ll look to measure progress on these objectives. For the “healthy culture” objective, they are expecting increased reporting of disciplinary actions (at least in the short term) and improved scores on a new D&I regulatory return. “Reduced groupthink” will also be tracked through the D&I regulatory return, along with supervisory engagements.

Then, the format. This being the FCA, there will be no prescription about what a solution should and could look like for businesses. They recognise the need for proportionality, but the minimum standards should at least give firms a better understanding of regulatory expectations. Importantly, no sector-wide targets are proposed.

So about these minimum standards? Non-financial misconduct would explicitly become part of the “Fit and Proper” test for employees (including where such conduct occurs outside of the workplace), the Conduct Rules would be expanded to cover serious instance of bullying and harassment, and guidance on the Suitability Threshold Condition will be extended to include sexually – or racially – motivated offences and discriminatory practices.

A word on inclusion metrics. The FCA has long referenced the importance of speak up culture and psychological safety and so the objective to “reduce groupthink” is unsurprising. They propose that larger firms report annually on a range of inclusion metrics including whether employees feel safe to speak up if they observe inappropriate behaviour or misconduct, that their contributions are valued and meaningfully considered and that their manager cultivates an inclusive environment at work.

So what needs to be in a D&I strategy? Over and above objectives and goals, the FCA is expecting to see initiatives for accomplishing the goals and measurement criteria, a defined approach to managing obstacles and ways to ensure staff know about the D&I strategy.

While this Consultation is fresh and closes in December, the FCA expect to develop a Policy Statement in 2024 and then bring rules into force 12 months from the publication of that Statement. But, even just from the proposals, there are a lot of changes coming. All firms should think about how their disciplinary processes around non-financial misconduct will feed into this exercise. Larger firms have the added job of considering how they will collect benchmarks, measure culture, and ensure they will have sufficient resources and systems in place to manage both their strategic initiatives and reporting obligations.

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