FCA / PRA focus on D&I: What do firms need to be doing now?

Last year, the FCA and PRA published Consultation Paper (CP) 23/20 “Diversity and inclusion in the financial sector – working together to drive change” and “CP18/23 – Diversity and inclusion in PRA-regulated firms” respectively. The requirements are expected to come into force in H1 2025, and whilst formal feedback on the CPs is not expected until H2 2024, there are steps that firms can be taking now, in advance of the final requirements being published, to get ahead.

We set out below, 10 practical tips for regulated firms to consider to ensure that D&I considerations are effectively and impactfully embedded into their policies, procedures, controls, systems and governance structures.

1. Identify potential areas of risks as soon as possible

Working out potential areas of weakness early, will give firms maximum time to put in place measures to address these issues. There are different methods and tools that firms might adopt in this regard, but one approach is to conduct workplace reviews and risk assessments to proactively identify problem areas.

 

2. Think about how you are going to collect relevant data

Collecting relevant data from staff is important in ensuring that the firm can build effective strategies to address any D&I imbalances within the organisation. However, staff may feel vulnerable about disclosing sensitive information about their demographic characteristics. Given that responding to a D&I questionnaire is voluntary, and firms cannot force staff to respond, it is important to have an open dialogue with employees to encourage them to provide their information and to provide reassurance about how the firm will use any data that it collects.

 

3. Consider embedding D&I considerations into the end-to-end lifecycle of employees and board members

There are a range of factors to consider in this regard:

• Recruitment and selection - the recruitment process should be conducted on the basis of merit, against objective criteria that avoids discrimination.
• Promotion and conditions of service – firms should be thinking about how D&I considerations are embedded into the ongoing employee / board member journey.
• Termination of employment and succession planning (for the board) - firms should ensure that redundancy criteria and procedures are fair and objective and are not directly or indirectly discriminatory. In a board context, firms will need to be thinking about succession planning and how this supports the D&I agenda. 

 

4. Gather relevant policies and procedures, and start the process to review these and identify ‘gaps’

Firms will need to think about what policies and procedures they already have in place (which may need to be updated) as well as areas where new policies and procedures need to be built. This may include, where relevant, the generation of D&I strategies. Some questions that firms may want to consider in this context include:

• What policies and procedures does the firm have in place?
• How often are they reviewed / updated?
• Are these appropriately tailored to the firm’s needs and directly address the risks identified in reviews or risk assessments, with clear reporting procedures in place?
• Are any changes necessary in light of the recent proposals?
• Do any new policies / procedures need to be drafted? By way of example, does the firm have in place bullying and harassment and other equality, diversity and inclusion policies? Is there a clear criteria / question list for interviews that reflect D&I considerations?

 

5. Assess whether the existing training programme is adequate, or whether additional focused sessions are required or changes need to be made to the existing sessions

Ensuring that your workforce is well-informed about D&I can determine the success of a firms’ strategy. Firms should consider their current training programme, and test whether or not it needs to be developed / enhanced given the new regulatory focus on this area.

 

6. Critique internal complaints procedures

There has been an increasing trend in the use of non-disclosure agreements (NDAs) to ‘cover up’ allegations of abuse, harassment and discrimination. Whilst NDAs may have a legitimate commercial use, they are often thought to protect firms from reputational damage and make problems ‘go away’. Firms should think carefully about their use of NDAs. 

Some questions that firms may want to consider in this context include:

• What processes does the firm have in place to monitor the treatment and outcomes of any complaints of discrimination, harassment or victimisation that are received to ensure that they are properly investigated and resolved, those who report or act as witnesses are not victimised, repeat offenders are dealt with appropriately, cultural clashes are identified and resolved and workforce training is targeted where needed?
• Does the firm take complaints seriously and investigate them thoroughly?
• Do staff members know what they should do if they have suffered any harassment, bullying or discrimination, or have witnessed the same?
• Has the firm implemented procedural safeguards in respect of investigations into complaints made, including:

1. taking a zero-tolerance approach against and protecting complainants from retaliation, ensuring that the subject(s) of any such complaint and witnesses are reminded throughout the investigation and upon conclusion that they must not retaliate against the complainant, or else face potential disciplinary action in respect of the same;
2. offering enhanced and individualised wellbeing support for all parties involved in any such investigation; and
3. reminding complainants that any instruction to keep the investigation confidential does not prevent them from making requisite disclosures; for example, to regulators, the police or for the purpose of making a protected disclosure in accordance with whistleblowing legislation.

 

7. Consider how to embed D&I considerations into the firm’s interactions with third parties, be that internal or external 

Firms should also be thinking about how their approach to D&I impacts their interactions with third-parties. Some factors to consider include whether the third-party:

• Understands the firms’ business and industry?
• Is sufficiently flexible in terms of the firm’s needs, plans and budget?
• Has an appropriate depth of knowledge. 

 

8. Identify ways to embed D&I considerations into the firm’s governance structures

Use of champions

D&I champions are designated employees who are actively responsible for promoting the D&I strategy in the workplace. Where firms do not have D&I champions already in place, they may want to consider appointing an individual to such a role.

Senior management

Senior managers are important for encouraging the right “tone from the top” as key decision makers. Some questions that firms may want to be asking themselves in this context include:

• How are senior managers encouraging the right “tone from the top”?
• Are senior managers challenging the behaviour of their team members and raising questions when it is appropriate to do so?
• Where required (for dual-regulated firms), how will the firm choose to allocate overall responsibility for culture / D&I to a specific senior management function?
• If the firm is not technically required to allocate responsibility (i.e. because it is solo regulated) will it do so anyway?

Governance / Responsibilities for staff and the board

The FCA and PRA proposals are flexible enough to allow most firms to review and fine-tune existing governance arrangements. Regulators are aware that firms already have to comply with a broad set of qualities and competences when recruiting to the board, and to put in place a policy to promote board diversity. Draft guidance proposes that matters relating to D&I are to be considered as a non-financial risk and treated appropriately within the firm’s governance structures. 

 

9. Consider what additional internal support networks might be helpful to put in place

A more inclusive workplace creates further opportunities and allows staff to work at their best. Internal D&I structures can prove useful in helping employees feel supported and elevating business performance. Internal employee networks can allow employees of different backgrounds to join together and provide care to one another, as well as foster open communication to others within the firm enhancing transparency and knowledge of D&I issues. These groups can also be used to feedback to senior management on specific problem areas they have identified and discussed. By providing a safe place, employees can safely and confidently voice their concerns, creating internal change at a grassroots level. Internal networks can also provide opportunities for professional development.

 

10. Think about how to build D&I into the structures that the firm has put in place to address other regulatory initiatives

The FCA’s view is that greater D&I can create better outcomes for consumers and markets by supporting healthy work cultures, reducing groupthink, unlocking talent and improving understanding of diverse consumer needs. Therefore, the Consumer Duty and D&I are aligned and mutually reinforcing and integrating D&I into business strategies does not just create a fairer workplace, but significantly enhances how customers perceive and interact with firms. For product development and marketing, D&I can drive innovation by inviting diverse perspectives that might not otherwise be considered. Teams that include individuals from a range of backgrounds can leverage their unique insights to create products and marketing strategies that appeal to broader audiences. 

Key takeaways

The practical steps outlined above allow for the first step in making D&I a significant feature of firms’ regulatory compliance. We have recent experience of advising clients in relation to the D&I. If you have any questions in relation to the D&I impacting the sector, including implementing policies and procedures to assist legal and regulator compliance requirements, please contact either of the authors.