Diversity & Inclusion: FCA findings on firms' approaches to D&I

On 12 December 2022, the FCA published the findings from its qualitative research in respect of the diversity and inclusion ("D&I") strategies and practices that regulated firms ("Firms") currently have in place to improve D&I within their workforce ("FCA Review").

Though the FCA Review does not amount to regulatory guidance on D&I, it does provide a clear picture of what the FCA's expectations are when it comes to D&I; hence, the FCA encourages all regulated firms to consider the FCA Review when developing their own D&I strategies and practices.

In terms of background, it is worth noting that:

• The FCA together with the PRA and the Bank of England (the "Regulators") kick-started the discussion on improving D&I within financial services firms back in 2021 with the publication of a discussion paper (DP21/2). This discussion paper mapped out different policy options that the Regulators are considering to implement – though the future D&I rules and guidance will apply to all regulated firms, the discussion paper clarified that there will be no one size fits all approach to D&I (see our blog post here). The FCA has incorporated this approach to its FCA Review by selecting a diverse sample of Firms in its review;
• The FCA is expected to publish its consultation paper on D&I in 2023. The FCA Review should be viewed as the last step before the publication of the relevant consultation paper, feeding into the relevant policy recommendations;
• There is a separate FCA workstream on D&I that relates to rules applicable to premium and standard listed companies in respect to D&I on company boards and executive management (PS22/3; and see our blog post here).

Key takeaways from the FCA Review

Methodology: The FCA Review is based on two sets of data:

• The FCA has collected data from a sample of 12 Firms – selection was based mainly on gender gap differences and the diverse nature of the Firm (e.g. banks, asset management companies, payment services providers, etc.). The FCA Review relies primarily on this sample.
• In addition, following the publication of DP 21/2, the FCA undertook a voluntary survey of Firms to understand the type of D&I data that Firms were collecting. The relevant findings have been incorporated as an appendix to the FCA Review. Given its voluntary nature, the sample is self-selecting and hence any conclusions out of it are potentially less robust. However, the findings of this data analysis appear to broadly confirm the findings of the primary data analysis conducted by the FCA.

Key findings (weaknesses):

• Gender representation has so far attracted most of the attention in D&I, whilst ethnicity started to pick up more recently;
• There is a suggestion that a 'compliance approach, rather than a genuine commitment to diversity and inclusion' is driving some strategies – the FCA gave the example of firms which have focused almost exclusively on gender representation at senior levels because there are external targets and expectations for it;
• Firms tend to address D&I concerns through lateral hirings at the senior management level, hence D&I at the junior and middle management level is lagging behind;
• Firms do not have holistic D&I strategy and practices in place that include clear identification processes of the problem and challenges, as well as systematic monitoring procedures;
• Data quality was correlated to D&I performance – Firms with better diversity data tended to have a better understanding of their position and were better placed to decide which actions to take;
• Firms' existing D&I practices show an overreliance on measures such as training, network groups and allyship. Other practices include: supporting career progression for staff returning to work; encouraging parental leave for both men and women; setting specific business area targets; extending the reach of entry level recruitment beyond elite universities; diverse shortlists; diverse interview panels; and anonymised CVs;
• Firms' senior managers were accountable for D&I through their pay and bonuses; however, it was unclear how these accountability structures work in practice;
• Firms that are members of international groups are applying international group-wide D&I policies which, however, are not tailored to UK circumstances or characteristics.

Next steps: Firms that were part of this review received written feedback letters from the FCA. The FCA plans to follow up with these Firms through its usual supervisory activities to assess how they have considered the FCA's feedback.

In conclusion

The FCA Review does not in itself amount to new regulatory guidance. However, it does provide more clarity as to what the FCA expects from regulated firms in terms of D&I practices; and all regulated firms should take into consideration these findings when drafting their own D&I policies and structuring their D&I framework. Achieving a more diverse and inclusive financial services industry is an important part of the ESG priority the FCA has set out in its Business Plan for 2022 to 2025. The FCA also clearly views D&I as an essential part of its overall focus on improving decision-making and culture within firms. Firms should pay heed to the steer from the FCA on how it expects firms to engage with the D&I agenda.

Please reach out to us if you wanted to discuss this topic. HSF can provide support with managing D&I risk and developing your D&I framework.

HSF Resources

• As the FCA identifies a culture dividend from diversity and inclusion, firms should prepare for more scrutiny, 7 April 2021
• Driving Meaningful Change in Diversity and Inclusion in the Financial Sector – The Regulators’ Proposals, 14 July 2021
• Diversity and inclusion: both a path and a destination, 6 January 2022
• FCA publishes final rules on diversity-related disclosures by listed companies, 25 April 2022