On 7 July 2021, the Bank of England, Prudential Regulation Authority (“PRA”) and Financial Conduct Authority (“FCA”) published “DP 21/2 Diversity and Inclusion in the Financial Sector – working together to drive change”. This is the first joint discussion paper (the “DP”) from the UK’s financial regulators on the topic of diversity and inclusion.

The need for greater diversity and inclusion

The DP makes clear the regulators’ view that diversity and inclusion, particularly at the level of boards and senior management, are critical to their work on culture and governance.

For the FCA, the focus (consistent with its statutory objectives) is around the treatment of consumers. For the Bank of England and PRA, the key consideration is about the linkage between insufficient diversity and inclusion and groupthink, which the regulators perceive to present a serious risk to safety and soundness. Their goal is to see increased diversity and inclusion in financial services translate into safer and sounder firms with better internal governance and risk management, a more innovative industry, and financial products and services that meet the diverse needs of consumers.

The DP continues to advocate for greater diversity and inclusion in the UK financial services industry as regulatory matters, as signposted in the speeches of Georgina Philippou and Nikhil Rathi in March 2021.

It’s now very clear that employers in the financial services sector (including the PRA, FCA and Bank of England themselves) will need to do more on diversity and inclusion. Whilst the City minister John Glen has said that the government will not mandate a single blueprint for financial services firms to improve diversity, it is looking for firms to show a real commitment to tangible action and results to improve diversity, and a plan on how to get there.

The DP surveys the current environment of diversity and inclusion in the financial services sector, and seeks views on various topics which the regulators consider to be key to making progress in this area. The DP is open for responses until 30 September 2021.

Topics for discussion

The DP is designed to create conversation and debate, and encourage dialogue between firms and their regulators on the subject of diversity and inclusion. The proposals in the DP cover two broad themes: (1) measuring progress; and (2) culture and policy.

In the DP, the regulators have set out policy options including, among others, the use of targets for representation, measures to make senior leaders directly accountable for diversity and inclusion in their firms, linking remuneration to diversity and inclusion metrics and the regulators’ approach to considering diversity and inclusion in non-financial misconduct. The DP also focuses on the importance of data and disclosure in order to enable firms, regulators and other stakeholders to monitor progress.

Whilst further consultation will likely be required to implement some of the proposals set out in the DP, the document articulates the regulators’ views on this topic, and signposts proposed changes in how they might expect firms to approach diversity and inclusion.

Data collection, measurement and reporting on this topic is likely to evolve significantly, as is the way that regulators expect firms to use policies, the SMCR and variable remuneration to drive more diverse and inclusive outcomes.

Importantly, the regulators are not focussed on any particular area of underrepresentation. The DP recognises the inherent contradiction of concentrating only on one aspect of diversity, and as such makes proposals on a wide-ranging basis, with reference to all protected characteristics under the Equality Act, and beyond.