D&I is without a doubt becoming a greater area of focus within the world of employment. Organisations are recognising the benefits of having a diverse and inclusive workforce, which include – to name a few – significantly increased innovation, boosted employee engagement and even better decision-making.
There is still a long way to go for many organisations, but the UK is certainly heading in the right direction – especially since the FCA’s announcement surrounding changes to current UK employment law.
In 2021, the UK’s Financial Conduct Authority (FCA) introduced new mandatory rules regarding the reporting of D&I. They then took this a step further in 2022 by implementing new practices around D&I reporting for financial firms requiring D&I data to be collected and reported to board members and executive management of UK-listed companies. The rules seek to improve D&I and improve transparency and accountability.
In this article, we’ll look at what this means for financial organisations.
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Who are the FCA?
You’ve probably heard the term ‘regulated by the FCA’ in adverts or the fine print of agreements. But who are the FCA, and what do they do?
The FCA (Financial Conduct Authority) are a regulatory body in the UK responsible for overseeing and regulating financial firms and markets. First established in 2013 to replace the Financial Services Authority (FSA), the FCA is an independent non-governmental body funded by the financial services industry.
The main objective of the FCA is to ensure that financial markets operate transparently and fairly and to protect consumers. The scope of the work carried out by the FCA is sizeable, but its key responsibilities include supervising financial firms, setting standards for conduct, and enforcing compliance with regulations. The FCA’s remit covers various financial products and services, including banking, insurance, investment, and pensions.
The Current State of D&I in the Financial Sector
According to PwC’s annual diversity and inclusion report, progress has been made by financial services firms in the UK in terms of D&I. However, there is still a long way to go. The report outlines areas of D&I where financial firms are still falling short:
There has been some progress in terms of representation, with more women and individuals from ethnic minority backgrounds being hired at entry-level positions. However, there is still a lack of diversity in senior leadership positions, with only 17% of executive committees being gender-diverse and only 9% being ethnically diverse.
The report found that many employees still experience behaviours that don’t promote belonging and inclusivity – largely micro-aggressions. Only 49% of financial services employees surveyed through the PwC research felt that their organisation was inclusive.
New FCA D&I Reporting Rules, Explained
In a move to improve pay parity, companies must now report gender pay gap information. Yet there is currently no UK employment legislation that requires UK organisations to report on their D&I metrics.
The reporting requirements apply to all UK-listed companies. The reports need to be produced annually and published on their company website for everyone to see. The listed companies will be required to report on information relating to the following targets on a ‘comply or explain’ basis:
- 40% of the board should be women.
- One senior board member should be a woman (as a minimum).
- One board member should be from an ethnic minority (using ONS categories).
In addition to these targets, listed companies will be required to report on the following:
- Diversity: Organisations now need to report on the diversity of their senior management team and board members.
- Policies and procedures: Organisations will be required to report on the policies and procedures they have in place to promote D&I in their workplace in respect of senior leaders. This includes their approach to recruitment, retention, and promotion of employees from diverse backgrounds.
- Cultural assessment: Organisations need to carry out a ‘cultural assessment’. This is aimed to identify any barriers to D&I within their organisation. They will be required to report on their findings.
- Action taken: Reporting on the action they have taken to promote D&I will also now be required. This should cover information such as initiatives implemented to support minority groups.
- Targets and progress measuring: Financial firms will also be required to set goals in respect of D&I, in addition to the wider targets set by the FCA, and also report on their progress towards these goals.
Impact of New D&I Reporting Rules
The new FCA D&I reporting rules are designed to promote transparency and accountability in the financial services industry and to encourage firms to take concrete steps to improve D&I within their organisations.
The new rules are likely to have a significant impact on the financial services industry for the better:
- Increased awareness: The reporting requirements could help to increase awareness of D&I issues within the financial services industry. This increased awareness could help to foster a culture of inclusion within the industry, which could have positive impacts on employee engagement, retention, and productivity.
- Increased transparency: The reporting requirements aim to increase transparency around employee D&I and the composition of senior leadership teams in financial services organisations. This increased transparency could help to identify areas where there is a lack of diversity and could encourage firms to take steps to address these issues.
- Accountability: The requirement for firms to nominate a senior executive who will be accountable for the D&I data and report could help to ensure that there is a focus on D&I at the highest levels of the organisation. This could help to drive change within the organisation, ensure that D&I initiatives are taken seriously and avoid employment tribunals.
- Competitive advantage: Organisations that are able to demonstrate a strong commitment to D&I and a diverse workforce may be more attractive to customers and employees. According to a study conducted by Glassdoor, 76% of job seekers said that a diverse workforce is an important factor when considering companies and job offers. This shows that organisations that promote D&I have a competitive advantage in the marketplace, both from a company brand and employer brand perspective. Attracting top talent should become easier as a result.
As much as these new rules tick all the right boxes on paper, there are some potential limitations to the FCA regulations:
- Too vague: There are concerns that the new reporting rules may need to be more specific and provide more guidance to organisations on complying with the requirements.
- Data quality: One of the main concerns is that the FCA has not provided clear guidance on how firms should collect and report data on diversity and inclusion. This may lead to inconsistencies in how firms report on these issues. As a result, the accuracy and completeness of the data reported by organisations could be limited due to the data collection process, potential bias or errors in self-reported data, and the difficulty of collecting data on sensitive topics such as ethnicity and disability.
- Emphasis on metrics: There is a risk that organisations may focus too heavily on metrics and meeting reporting requirements, compliance and collecting data, rather than taking concrete actions to improve D&I within their organisations.
- Limited scope: There is thought to be an emphasis on gender and ethnicity which may mean that other underrepresented groups, such as those with disabilities or from lower socioeconomic backgrounds, may be overlooked.
- Limited enforcement: While the FCA has stated that it will monitor compliance with the reporting requirements, the penalties employers may face for non-compliance is yet to be clarified. If organisations don’t see penalties for others failing to report, this may have a domino effect on others and a reluctance to report at all.
- Unwanted consequences: The reporting requirements may have unintended consequences, such as companies avoiding promoting certain groups of people into management and leadership positions to maintain their reporting statistics.
How will these new rules be monitored?
The FCA has stated that it will monitor compliance with the new D&I reporting rules through its supervisory activities. The FCA will review the annual D&I reports submitted by financial services organisations to ensure they meet the reporting requirements and will take ‘appropriate action’ if firms are found non-compliant.
The FCA has not specified what penalties firms may face for non-compliance. Still, it has stated that it will use various supervisory tools to encourage compliance, including engaging with firms directly and taking enforcement action where necessary.
The FCA has also stated that it will work closely with other regulatory bodies, such as the Prudential Regulation Authority (PRA), to ensure consistent standards for D&I reporting across the financial services industry.
Furthermore, there is also likely to be external scrutiny of organisations’ D&I reports by investors, customers, and other stakeholders, which should support the monitoring process. As a result, firms found to be non-compliant or not demonstrating a commitment to D&I may face reputational damage and loss of business.