UK Financial Services Regulators' Focus on Diversity and Inclusion

For the purposes of the proposals, the UK Regulators have suggested their own interpretation of "diversity" and "inclusion".

For diversity, the UK regulators are focusing on "diversity of thought" or "cognitive diversity" which they define as: "bringing together a range of different styles of thinking among members of a group" which could include "different perspectives, abilities, knowledge, attitudes, information styles, and demographic characteristics, or any combination of these". 

For inclusion, the UK Regulators define this as: "the practice or policy of providing equal access to opportunities and resources for people who might otherwise be excluded or marginalised, for example due to demographic characteristics".

The UK Regulators believe that diversity and inclusion is important for promoting well‑functioning markets, the integrity of the financial system and the safety and soundness of Firms through better quality decision-making and reduced groupthink. The UK Regulators also believe that increasing diversity and inclusion will improve outcomes for consumers through a better understanding of customers' needs and encourage greater innovation and competition.

Diversity and inclusion will differ for each Firm.  The UK Regulators intend that some of the measures proposed on the Discussion Paper would only apply to larger Firms with some rules having proportionate requirements for smaller Firms. 

Thresholds for large and smaller Firms may be based on existing, familiar thresholds (such as those under the Senior Managers and Certification Regime or Companies law).  There are no concrete proposals at this stage on how this would operate.  The discussion paper specifically asks for feedback on the minimum number of directors necessary to ensure that the future potential requirements, or expectations around representative Boards, are meaningfully applied. The paper also raises specific questions about succession planning. 

Although many Firms are already subject to a number of rules which impose some diversity requirements, such as rules on the composition of the management body and gender-neutral remuneration policies and practices, the proposed new rules are expected to go well beyond this.

The EU has increasingly focused on diversity through targeted measures such as the joint ESMA and EBA Guidelines on the assessment of the suitability of members of the Board and key function holders under the Capital Requirements Directive and the Markets in Financial Instruments Directive and through requirements in the EU Investments Firms Directive for gender-neutral remuneration policies, gender‑balanced remuneration committees and gender‑pay gap reporting for larger firms. 

However, the UK regulators have decided to take a much broader approach to diversity and inclusion through more general rules applicable to all Firms.  As a result, rather than the gender‑balanced remuneration committee and gender‑pay gap reporting requirements being considered as part of the UK Investment Firms Prudential Regime (IFPR) (which is largely based on the EU Investment Firms Directive and Regulation), these will be considered as part of the FCA's more general work on diversity and inclusion as discussed here.

The UK Regulators are very keen to ensure that a commitment to diversity and inclusion is reflected in "the tone from the top".

At board level, the board would be ultimately responsible for a Firm’s strategy and culture.  It would be expected to set the diversity and inclusion strategy and policy and oversee its progress as well as hold management to account.  Diversity should also be a key consideration when recruiting to the board and for succession planning, which could involve the setting of targets for underrepresented genders.  Where a Firm has a nominations committee, this body could be responsible for this role.

For other senior personnel, the UK Regulators are also considering how responsibility for diversity and inclusion could be incorporated into the senior managers' regimes applicable to many Firms.  This would potentially have the result of making a particular senior management function holder individually, directly accountable for ensuring appropriate diversity and inclusion measures. 

The UK Regulators may also include senior management diversity when considering the collective suitability of the Board and senior management and the risk of possible groupthink. In some circumstances, a lack of diversity could provide grounds for withholding any relevant approvals.

The Discussion Paper suggests that remuneration could be a key tool in driving progress in the area of diversity and inclusion.

Suggestions include using the advancement of diversity and inclusion, and performance against any related objectives, as part of non-financial criteria for variable remuneration (which has already been proposed under the FCA's new IFPR rules).  The paper contemplates that senior managers would have these criteria included as part of their remuneration.  Poor performance in this area could also be grounds for adjustment.  

In addition, the UK Regulators have suggested making it explicit in their rules that a Firm’s remuneration policy should ensure that all types of remuneration, both fixed and variable, do not give rise to discriminatory practices.

The UK Regulators believe that the introduction of a diversity and inclusion policy should be a central consideration for Firms with a possible requirement for all Firms to have such a policy and to publish it on their website.

It is anticipated that any diversity and inclusion policy would have some minimum foundational requirements but that these would be proportionate and the UK Regulators would not otherwise be particularly prescriptive about the content.  Minimum requirements would be likely to include: policies to promote diversity on the board; clear objectives; realistic goals; a plan for meeting those goals and ways for measuring progress.

The UK Regulators are also seeking views on training and on targets for underrepresented groups for senior management and customer-facing roles.

Additional guidance on "non-financial misconduct", which potentially has implications for a person being considered "fit and proper" in order to carry on controlled or certified functions or which may need to be declared in regulatory references, may also be issued. 

This additional guidance could include evidence of sexual harassment, bullying and discrimination on the basis of someone’s protected (or otherwise) characteristics as being factors to take into account when considering non-financial misconduct.

Discriminatory activity by a Firm could also be relevant for Threshold Conditions with a Firm engaging in discriminatory activities considered not to be a "fit and proper person" for the purposes of carrying out regulated business.  In an extreme scenario, this could lead to a Firm's authorisation being withdrawn.

In this context, you may be interested in our June 2021 briefing on investigating workplace misconduct and the link to diversity and inclusion.

Regular reporting to the UK Regulators on employee diversity and inclusion data is being considered.  This could include information on the membership of the board and the executive committees; demographic diversity of the board, senior managers and workforce; any internal diversity targets, and high-level data on demographic diversity characteristics and inclusion practices.

More immediately, the UK Regulators intend to issue a one-off voluntary pilot data survey in Autumn 2021 to test Firms' ability to provide data.  Selected Firms will be contacted in due course.

The UK Regulators are also planning to consult on requirements for Firms to publicly disclose a selection of aggregated diversity data, as well as their diversity and inclusion policies, so that other firms and stakeholders can benchmark progress.  This could include pay gap data, diversity data on senior management and employees and measures of inclusion.  This may also link into remuneration disclosures under IFPR.  Diversity and inclusion audits are also another possible measure.

The FCA has issued a separate Consultation Paper setting out draft rules on diversity for listed company boards and executive committees, expected to enter into force in 2022.  This sets three "comply or explain" targets:

• At least 40% of the board should be women (including those self-identifying as women).
  
  
• At least one of the senior board positions (Chair, Chief Executive Officer (CEO), Chief Financial Officer (CFO) or Senior Independent Director (SID) should be a woman (including individuals that self-identify as a woman).
  
  
• At least one member of the board should be from a Non-White ethnic minority background (as defined by the Office for National Statistics).

If you would like further information on the Discussion Paper and its potential impact – or assistance on diversity and inclusion in the workplace more generally – please speak to your usual Travers Smith contact or any of the individuals below.