The FCA has announced a significant shift in its regulatory priorities, opting to forego new diversity and inclusion rules and delaying further action on non-financial misconduct. This decision, conveyed in a letter to the Treasury Select Committee, follows a joint consultation with the PRA in September 2023 and comes amid a rapidly evolving legislative landscape.  

The FCA’s initial proposals aimed to bolster diversity within financial services, aligning with recommendations from the Committee’s Sexism and the City report. However, after careful consideration of consultation feedback, the regulator has decided against publishing new rules for the time being.

In the letter, the FCA recognized the evolving legislative landscape concerning employment rights, gender action plans, and pay gap reporting, and said it will align its regulatory approach with these existing initiatives “to avoid duplication and unnecessary costs.”

Voluntary initiatives

The decision reflects a move towards supporting voluntary industry initiatives rather than imposing new mandatory requirements. This approach also addresses concerns raised by the Committee regarding data collection proposals. The PRA has similarly decided against implementing new rules in this area.  

The FCA maintains its commitment to fostering diversity and inclusion, acknowledging its potential to improve governance, decision-making, and the long-term competitiveness of the UK financial services sector.  

Non-financial misconduct

While the FCA remains committed to tackling non-financial misconduct, it has decided to delay outlining its next steps until the end of June this year. The regulator said it recognized the detrimental impact of corporate cultures that tolerate harassment and other forms of misconduct, which can undermine consumer protection and market conduct.  

“We are committed to this work, so that all regulated firms are subject to the same standards,” the FCA stated. “But it is important that our approach is proportionate and aligned with planned legislation.”

The delay is attributed to the changing legislative landscape since the initial consultation. The FCA aims to refine its approach to ensure it is both proportionate and effective.  

Industry response

The FCA’s decision to prioritize voluntary initiatives on diversity and inclusion has been met with mixed reactions from industry stakeholders. While some have welcomed the reduced regulatory burden, others have expressed concern about the pace of progress on diversity within the sector.

It has also been suggested that other factors could also be in play, such as the US pushback against DEI policies and the UK government’s drive to stimulate growth by reducing regulation.

Simon Morris, a financial services Partner with law firm CMS, welcomed the news that the PRA and the FCA have dropped their contentious proposals to implement what he saw as a politically driven DEI agenda. He said: “The proposals went well beyond the obvious – and current – requirements of treating all staff equally and all customers fairly.

“The PRA’s plan to impose minimum ethnic and gender quotas on banks and insurers stretched its statutory objectives to breaking point. The FCA’s onerous data gathering requirements were equally unwelcome.”

“It is not increased disclosures and check-box actions that will move the dial in this area, but rather greater onus on firms having requisite senior accountability for the fostering of healthier firm cultures.”

Emily Lemaire, associate, Covington financial services

Countering Morris’s view, Harriet O’Brien, ESG consultant at Danesmead ESG, said: “Though the desire to minimise excessive regulatory pressures is understandable to a point, given the weight of evidence that things are not improving for women and unrepresented groups in this sector – as explained in detail in the Sexism and the City report – it is disappointing that the FCA does not deem this a priority issue.”

Rob Mason, Director, Regulatory Intelligence Strategy & Market Intelligence at Global Relay, said: “While by no means the same thing, the tension between the FCA’s work on NFM and suspending further work with the PRA on diversity and inclusion is notable. However, it feels more relatable that axing further DEI rulemaking may be due to current similar movements in the US.”

Emily Lemaire, associate in Covington’s financial services practice, also referenced the Sexism in the City report. She said: “This latest decision to drop the D&I proposals was, perhaps, expected given industry-wide feedback that the data-collection requirements would not achieve the intended aim of the proposals, ie to foster greater diversity within financial services.

“This point was fervently made by the Treasury Select Committee in its findings to the Sexism in the City inquiry – such that it is not increased disclosures and check-box actions that will move the dial in this area, but rather greater onus on firms having requisite senior accountability for the fostering of healthier firm cultures (including the firm’s approach to NFM).”

“It feels like a fair assumption that the FCA will continue to push on NFM. Any work in this area doesn’t harm growth and could arguably enhance it.”

Rob Mason, Director, Regulatory Intelligence Strategy & Market Intelligence, Global Relay

The delay in outlining next steps on non-financial misconduct leaves room for speculation about the FCA’s future regulatory approach in this area.

Mason provided some clarity and said: “The FCA has put a fair amount of weight behind its non-financial misconduct agenda this year, including the ‘Dear CEO’ letter and Emily Sheppard’s speech on the contagious nature of culture.

“It feels like a fair assumption that the FCA will continue to push on NFM. Any work in this area doesn’t harm growth and could arguably enhance it, as uncovering further instances is for the long-term benefit of the industry.”

Agreeing with Mason, Lemaire said: “We have seen the FCA placing greater emphasis on culture recently, including through Emily Sheppard’s poignant speech on February 4 that reminded firms that failings in culture and governance are routinely found to be the root cause of consumer protection and market conduct issues.

“Despite the NFM proposals being delayed, we expect regulatory supervisory and enforcement action to continue to increase on these topics in the short term – therefore, firms should be minded to ensure that NFM and related considerations are readily incorporated within their firm policies and procedures, and to routinely scrutinize any misconduct to determine whether it is indicative of a broader culture issue that must be addressed.”

Along with industry participants, GRIP will be watching closely for the regulator’s announcement in June.