Discussion Paper opens debate on potential new rules to improve diversity in financial services.

By Rob Moulton, David Berman, Paul Davies, and Charlotte Collins

On 7 July 2021, the FCA, the PRA, and the Bank of England published a joint Discussion Paper on diversity and inclusion in the financial sector. The regulators, in particular the FCA, have been focused on diversity and inclusion as regulatory issues for some time. According to the regulators, research shows there is a positive correlation between increased diversity and inclusion and better outcomes in risk management, conduct, culture, and innovation. Therefore, improving diversity and inclusion in financial services is seen as tying in closely with the regulators’ objectives. In the Discussion Paper, the regulators consider diversity and inclusion not only in terms of how a firm is run internally, but also how the firm serves its customers.

The purpose of the Discussion Paper is to explore how the regulators can accelerate the pace of meaningful change, and what role they can play in facilitating that change. These considerations are inextricably linked with other key focus areas for the regulators, including environmental, social, and governance (ESG) issues and the FCA’s work on conduct and culture.

The Discussion Paper is relevant to all regulated firms and financial market infrastructures, including UK branches of overseas firms, although the regulators emphasise that any future policy will operate on a proportionate basis, taking into account firms’ structures and business models.


The Discussion Paper follows the Covid-19 pandemic, which has brought more focus on the “S” element in ESG. Social risk management is seen as key for “building back better”. In terms of disclosure, “social” has long been behind the environmental and governance metrics. As racial justice, gender equality, and broader social justice issues are taking prominence in the workplace, they are becoming material issues for senior leadership teams and employees to act on and monitor.

While the financial services sector has seen various (often voluntary) initiatives in relation to diversity and inclusion, the regulators acknowledge that the pace of change has been slow. Regulatory expectations have been articulated in numerous speeches and Dear CEO letters, and some specific requirements regarding diversity have been implemented (e.g., banks must meet prescribed requirements regarding board diversity and implement a gender-neutral remuneration policy). However, these requirements typically stem from EU legislation and are sector-specific, leading to a fragmented approach and inconsistencies across different types of firms. As such, the regulators now aim to introduce concrete regulatory expectations in the area of diversity and inclusion for all firms. They want to see firms take meaningful steps to achieve greater representation at all levels, but particularly at the board and senior management levels. While there has been a strong focus on gender to date, the regulators want to make sure that firms also pay due regard to other diversity characteristics, such as socio-economic background, with a primary purpose of encouraging and bringing about diversity of thought. The more perspectives that are brought to bear on a key decision, the greater the likelihood of an optimal course being adopted.

The regulators consider that diversity and inclusion are key to a healthy culture. Greater diversity should support having a wide range of views across an organisation, while inclusion should create the necessary environment for individuals to be able to express these views, speak up, and raise concerns.

Potential Proposals

The regulators outline what future policy measures they might introduce. These include measures for firms to consider internally, such as expectations regarding governance, senior management, remuneration, and policies and procedures. They also include considerations for the regulators to incorporate into their supervisory approach, including how issues relating to diversity and inclusion could affect the suitability (“fitness and propriety”) of individuals and firms for regulatory approval.

Tone From the Top

The regulators see boards and senior management as key to the success of any future requirements. Specific regulatory expectations may include:

  • Requiring the board to set the firm’s diversity and inclusion strategy and policy, and oversee its progress
  • Expecting the board to monitor and challenge progress on diversity and inclusion, including holding management to account
  • Introducing specific targets for board representation
  • Requiring the firm to think about diverse representation when carrying out succession planning
  • Ensuring accountability for diversity and inclusion through the Senior Managers and Certification Regime
  • Expecting the firm to use metrics linked to advancing diversity and inclusion as part of non‑financial criteria when setting variable remuneration awards
  • Expecting the firm’s remuneration policy to ensure that all types of remuneration, both fixed and variable, do not give rise to discriminatory practices

Policies and Practices

The regulators are considering the following measures:

  • Requiring firms to have a diversity and inclusion policy and publish it on their website (although the content of such policies would not be prescribed)
  • Expecting firms to think more about the progression of their employees as part of recruitment, promotion, and succession planning
  • Potentially expecting firms to set targets for representation and inclusion within boards, senior management populations, customer-facing roles, and/or the wider firm
  • Expecting firms to offer training on diversity and inclusion
  • Developing expectations on product governance that specifically take into account consumers’ protected characteristics or other diversity characteristics
  • Requiring firms to publicly disclose a selection of aggregated diversity data on their senior management population and employee population as a whole, as well as their diversity and inclusion policies
  • Expecting firms to consider carrying out internal diversity audits

Regulatory Measures

The regulators are considering how they will underscore the importance of diversity and inclusion in their supervision of firms and individuals:

  • Individuals: The regulators are exploring whether adverse findings in relation to individuals’ conduct with respect to diversity and inclusion issues could affect fit and proper assessments. The regulators are also considering whether to develop guidance on this topic to include evidence of sexual harassment, bullying, and discrimination on the basis of someone’s protected characteristics as factors to take into account when considering non-financial misconduct. Because firms would be expected to assess whether evidence of such behaviour constitutes a breach of the FCA’s Conduct Rules, the regulators consider that it may be helpful to develop guidance on how such behaviour, or failure to take reasonable steps to address this kind of behaviour, could result in a breach of the Conduct Rules.
  • Senior Managers: The regulators wish to increase their scrutiny of firms’ senior management diversity. They are considering whether to collect diversity data about individual senior managers as part of the information provided for Senior Management Function applications. Where the regulators have concerns that a proposed appointment would worsen or not address risks arising from a lack of diversity, they might consider whether these concerns could provide grounds for withholding approval.
  • Firms: The regulators may develop guidance on how they could take into account a firm’s record on diversity and inclusion in assessing whether the firm meets the Threshold Conditions.

More generally, the regulators suggest that firms should expect to find supervisors asking more questions about how they are embedding diversity across their business and creating a culture of inclusion. Firms should also expect diversity and inclusion to be a regular part of the regulators’ engagement with senior management and the board going forwards.

Data Collection and Reporting

The regulators note that firms are not currently subject to any reporting requirements that give the regulators an insight into the diversity of the financial services sector. Consequently, the regulators are considering introducing regular reporting of employee data — most likely data on the protected characteristics and socio-economic backgrounds of different categories of staff. Any future proposal for a regular data collection would most likely involve firms approaching staff to complete a questionnaire; therefore firms would need to consider how to lawfully collect, store, and share this data. The regulators would use the data both to inform future policy-making and to monitor and measure outcomes (and potentially hold firms to account).

The regulators plan to issue a voluntary pilot data survey in the autumn to help inform any future policy. The regulators expect that the data will assist with developing their general policy proposals around diversity, and also their specific proposals concerning reporting by firms, as it will allow them to assess what data firms have available.

A potential expectation would be for firms to develop metrics that enable monitoring of their diversity and inclusion initiatives. The regulators are also interested in views on the data that firms are using, or could use, to ensure that their products and services meet consumers’ needs.

Next Steps

Comments are requested by 30 September 2021. The regulators plan to publish a Consultation Paper at the beginning of 2022, which will set out proposed rules and guidance. They plan to follow this with final rules in Q3 2022. The FCA is also considering its approach to diversity in listed firms (in particular whether board diversity should be mandated), and plans to share more on its thinking on this topic in the coming months.