UK regulators, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), have put forward proposals to promote diversity and inclusion in the financial services industry. In consultation papers released this month, the regulators have outlined measures to “boost diversity and inclusion to support healthy work cultures, reduce groupthink, and unlock talent.”
The aim of these measures is to improve the safety and soundness of firms and better cater to diverse consumer needs. The regulators argue that increased diversity and inclusion within regulated financial services firms leads to improved internal governance, decision-making, and risk management.
The proposals include new rules and guidance highlighting that misconduct like bullying and sexual harassment poses risks to a healthy company culture. This guidance will assist firms in taking decisive and appropriate action against employees engaged in such behavior.
Financial Conduct Authority CEO Nikhil Rathi emphasized the importance of attracting and retaining the best talent for the competitiveness and well-being of the UK financial services industry. Rathi stated that the current data suggests this is not happening and the proposed measures will encourage leading firms to develop plans and report on their progress.
Rathi further noted that diversity within firms plays a crucial role in preventing groupthink. Firms that welcome a wide range of perspectives are better equipped to manage risks and uphold the safety and soundness objectives of the Prudential Regulation Authority.
The Financial Conduct Authority intends to reinforce its expectations regarding non-financial misconduct such as sexual harassment and how firms should consider this when assessing an individual’s fitness to work in the industry.
Both regulators acknowledged the progress made through government-led initiatives like the Treasury’s Women in Finance Charter and the Parker and FTSE Women Leaders Review. While they believe that diversity and inclusion are broader societal issues, they also recognize that regulators have a role to play in areas relevant to their objectives.
Following the release of the 2021 Discussion Paper, the Financial Conduct Authority and Prudential Regulation Authority have brought forward proposals that have received broad support. These recommendations establish flexible, proportionate minimum standards that raise the bar, with more requirements imposed on larger firms.
The proposed rules require firms to develop a diversity and inclusion strategy, report and disclose data on specific characteristics, and set targets to address under-representation. Flexibility is key in these proposals, with each firm encouraged to find its own solutions. Most of the requirements apply only to the largest firms.
Overall, the regulators aim to translate increased diversity and inclusion into improved internal governance, decision-making, and risk management within firms. This will contribute to the safety and soundness of firms, as well as better outcomes for policyholders, markets, and consumers.
The consultation on these proposals will remain open until December 18th.
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