What the UK regulators' proposals mean for D&I strategies in financial services firms

The UK financial services regulators’ latest proposals for improving diversity and inclusion (D&I) include detailed proposals in respect of in-scope firms’ D&I strategies. The proposals, if implemented, would represent a significant expansion of firms’ obligations in respect of D&I strategies, requiring firms to include certain content as a minimum, ensuring the strategy is easily and freely accessible, and imposing responsibilities on the board and senior leadership.

The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) are clear that they expect in-scope firms  to be transparent on their D&I aims and strategies, and to be held accountable for their progress against their stated objectives. The proposals – if implemented – will require in-scope firms to engage meaningfully with their D&I strategy, using evidence to identify goals and objectives, and ensuring their strategy is easily accessible to employees and other stakeholders. 

Form and content of D&I strategies

The regulators’ proposals in relation to D&I strategies will apply to:

  • All CRR and Solvency II firms, with respect to their establishment in the UK (including third country branches); and
  • All other firms with a Part 4A permission under the Financial Services and Markets Act 2000 who have 251 or more employees (excluding Limited Scope SMCR firms).

While CRR and Solvency II firms are already required to have in place a policy promoting diversity on the management or governing body (which is itself subject to potential changes under the proposals), the regulators’ proposals set out much wider-reaching obligations on in-scope firms extending to the diversity of the firm as a whole. 

Indeed, both the FCA and PRA have set out minimum expectations for what should be contained within a firm’s D&I strategy, expecting firms to tailor their strategy to reflect their own particular needs, operating environment and diversity challenges. While there is some overlap between each regulator’s minimum expectations, the FCA has generally adopted a more prescriptive approach than the PRA. Dual-regulated CRR and Solvency II firms will need to ensure that their strategy covers both regulators’ expectations.

The FCA’s minimum expectations for the contents of a D&I strategy are:

  • 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; and
  • Ways to ensure adequate knowledge of the D&I strategy among staff. 

The PRA’s minimum expectations include points which are broadly similar to the list above – for example, including “clear objectives and goals for improving diversity and inclusion in the firm, and a plan for meeting these” and “ways of measuring progress against the objectives and goals.” However, the PRA additionally expects firms’ D&I strategies to set out:

  • The firm’s core values, the culture that it is trying to create, and its commitment to diversity and inclusion; and
  • The role of the firm and staff in fostering an open and inclusive environment, including empowering colleagues to speak up and express their views. 

These are more expansive requirements. In particular, PRA and dual-regulated CRR and Solvency II firms will need to think carefully about how the firm’s core values and desired culture are expressed within their D&I strategies, and then take steps to effect this across the business. Firms will also need to be clear about their role – and the role of staff – in creating an open and inclusive environment, which is likely to focus on the firm’s speak-up culture, support available for employees, and how the firm is monitoring and promoting inclusivity. 

Stakeholder engagement

The regulators emphasise that stakeholder engagement is key for driving ambitious progress – they want staff to hold their own firms accountable for their progress (or lack of) towards their stated diversity goals.  Firms should be mindful that the FCA also envisages a wider category of stakeholders holding the firm to account.  For example, investors, suppliers and consumers.  In the current climate of consumer activism, care will need to be taken to craft a strategy that is accurate, measurable and achievable. 

It is with this in mind that the regulators propose that firms would be required to make their D&I strategy easily accessible and free to obtain. While the FCA suggests that making the strategy freely available on the firm’s website would likely satisfy this requirement, the PRA appears to go slightly further, suggesting that in-scope firms would be required to publish this on their website.

Not a “once and done”

Equally important is that firms’ D&I strategies are not drafted once, and then left to gather dust. Instead, firms’ D&I strategies should be dynamic and adapted to changing circumstances and challenges, specific to each firm. Firms will need to measure their progress against their diversity goals and review the strategy regularly to ensure that it remains fit for purpose. Responsibility for maintenance and oversight of the firm’s D&I strategy – and ensuring the strategy remains appropriate and effective – will sit with the firm’s board. Rather than being seen as a purely HR issue, senior leadership and the board must demonstrate their support for the strategy and role model the desired behaviours and culture to set the tone from the top. This may be a challenge for firms, with our recent research revealing that only 25% of respondents thought their leadership team role modelled expected behaviours. 
Senior management should endorse measures to ensure staff understand the importance of D&I, as well as their roles in supporting the strategy and promoting a speak up culture. This will support the development of the right tone from within and encourage participation at all levels. Our research indicated that only 40% of respondents rate their firm’s leadership as excellent or close to excellent in terms of their communication skills and visibility across the organisation, revealing that work is needed to ensure senior management’s messaging around D&I is effectively cascaded.

The regulators are expecting to see a step-change in the level of detail included in D&I strategies, and the prominence of those strategies within firms. Strategies will need to be thoughtfully crafted and implemented. 

Key points to consider now

  • Firms will need to identify “stretching but realistic” diversity objectives, based on evidence that takes account of their local environment and market, current D&I progress and areas for improvement informed by metrics and employee feedback.
  • As part of the objective-setting process, senior management should also consider how the strategy applies to every point of the employee life cycle to ensure a truly inclusive work environment. Firms may want to consider positive action as a potential mechanism to promote diversity, but will need to take care that the measures taken do not stray into unlawful positive discrimination. 
  • Firms will also need to determine how to track their progress and monitor the impact of their actions, and appropriate metrics for doing so. This is an essential part of the regulators’ proposals, which will be subject to supervisory scrutiny. It may present challenges in relation to data protection, particularly where this involves requesting and recording individuals’ protected characteristics, such as their race, gender, and disability status.
  • There will be practical considerations for how firms develop and embed their D&I strategies among staff. It will be important that employees are given the tools and support necessary to invest their time and participate fully in embedding the strategy and promoting an inclusive culture, taking their cue from the messaging of management and senior leadership. 

While the focus on diversity and inclusion is nothing new for regulated firms, these proposals would see a significant extension of firms’ regulatory obligations within this space. We have set out in this post the key points firms will need to have in mind regarding their D&I strategies, but this is just one of the regulators’ far-reaching proposals. In our next post, we will address in greater detail the key considerations firms will need to have in mind when considering their D&I targets. 


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This content was originally published by Allen & Overy before the A&O Shearman merger