After much talk, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have published a consultation paper seeking to boost diversity and inclusion to support healthy workplace cultures.
The consultation papers include proposed changes in respect of:
Non-financial misconduct: better integrated non-financial misconduct (NFM), covering bullying harassment and discrimination, considerations into staff fitness and propriety (F&P) assessments, the conduct rules and the suitability criteria for firms to operate in the financial sector.
Diversity and inclusion: introduce requirements to increase the pace of change on D&I in financial services. Firms will be required to:
report their average number of employees on an annual basis
collect, report and disclose certain D&I data
establish, implement, and maintain a D&I strategy (overseen at board level)
determine and set appropriate diversity targets
recognise a lack of D&I as a non-financial risk.
The FCA’s stance on NFM has already been well publicised; the consultation papers clarify what was already known and give firms hope that some much-awaited guidance is on the horizon.
As long ago as 2018, Megan Butler (a former FCA executive director of supervision) wrote in response to the Women and Equalities Committee report on sexual harassment in the workplace, that the FCA sees sexual misconduct as falling within the scope of the financial services framework.
In practice, regulated firms have been grappling with the concept of NFM for years when conducting F&P assessments and considering potential breaches of the conduct rules.
What is newly set out in the FCA consultation paper is the FCA’s guidance on what constitutes NFM. Previously, firms had to set their own bar as to what may or may not constitute NFM.
Firms will therefore welcome the guidance which will effectively set a minimum standard for the entire industry. However, decisions in this area are never going to be binary and firms will still have to apply their own judgement; each case will turn on its own individual facts and firms will continue to define their own organisation tolerance levels.
Most helpfully, the FCA has provided guidance as to what constitutes serious misconduct and would therefore be a breach of a conduct rule. The guidance clarifies that not every instance of misconduct towards a fellow member of the workforce will be a conduct breach and only serious instances will be caught.
Factors to consider when deciding whether there has been a serious breach include: whether the conduct is repeated, the duration of the conduct, the seniority of the person whose conduct is in question and the difference in seniority between the person whose conduct is in question and the subject of the conduct.
A failure by a manager to protect staff against NFM or to take seriously or deal effectively with complaints of NFM may lead to a breach of the conduct rules and it is hoped that this guidance will dissuade managers from sweeping difficult issues such as NFM under the carpet and ensure that they are tackled head-on, with appropriate action taken if needed.
The PRA has clarified that failure to achieve quantitative D&I targets related to diverse representation of demographic characteristics, would not necessarily amount to a failure to meet their responsibilities for SMFs in dual-regulated firms who have been allocated a prescribed responsibility for culture.
This makes sense as otherwise D&I target setting may have unintended consequences with responsible SMFs prioritising a ‘box-ticking’ approach rather than considering D&I progress more holistically. How much comfort it will provide to SMFs is debatable. The PRA says failure to hit targets would not necessarily amount to a failure to meet responsibilities, which suggests that a failure to meet D&I targets may (in certain circumstances) be seen by the PRA as a failure to meet SMF responsibilities.
The regulators’ proposals continue to turn the dial on improving D&I within the financial sector. The proposals reflect the regulators’ desire to accelerate the pace of change across the sector to deliver meaningful and lasting change.
Mandating aspects of D&I reporting and target-setting and encouraging voluntary action in other areas will enable the regulators and firms alike to take targeted action to improve the representation of relevant demographic characteristics within a flexible and proportionate framework.
Alison McHaffie is a financial services partner and Steven Cochrane an employment partner with law firm CMS