Greg Kilminster
Head of Product - Content
In mid-October 2023 the Financial Conduct Authority (FCA) announced a fine and ban against the ex-CEO of Barclays, James Staley. The fine of £1.8 million and ban on Staley holding a senior management or significant influence function is the latest example of non-financial misconduct (NFM) in the financial services industry.
According to the FCA’s decision notice, Staley had “recklessly” approved a letter sent by Barclays to the FCA, which contained two misleading statements about the nature of his relationship with Jeffrey Epstein.
During the last few years, other examples of NFM have been seen, particularly when financial services firms have been sued for discrimination and victimisation. These have included:
- A female employee of a major investment bank awarded £1.1 million in compensation for sex discrimination and victimisation.
- A former city banker winning more than £2 million for a successful sex discrimination claim involving an international investment bank.
- A former employee of a global bank alleging that he had been subjected to homophobic discrimination while working for the company. The employee alleged that he had been called homophobic slurs, that he had been denied opportunities for advancement, and that he had been retaliated against after complaining about the discrimination.
These cases show that discrimination and victimisation are still a problem in the workplace, and that employers need to be vigilant in taking steps to prevent and address these issues.
The FCA and the Prudential Regulation Authority have now published two new consultation papers outlining their proposals to introduce a new regulatory framework on Diversity and Inclusion and which build on discussion papers published in July of 2021.
This article unpicks the FCA’s consultation paper (Consultation Paper CP23/20: Diversity and inclusion in the financial sector – working together to drive change) and summarises the main proposals.
The CP notes that greater diversity can further support the international competitiveness of the UK’s financial services sector. Increasing levels of diversity within firms can help unlock talent from those with underrepresented characteristics and support career progression. It also notes that the CP is consistent with the recently introduced Consumer Duty, which requires that firms consider the needs, characteristics, and objectives of their customers, particularly those who are vulnerable.
The consultation’s objectives
The objectives of the consultation are as follows:
- Healthier firm cultures.
- Reduced groupthink (Groupthink occurs when groups of people make poor choices because members have either not considered or do not feel comfortable suggesting alternative options. This creates risks for firms).
- New talent unlocked.
- Greater understanding of, and provision for, diverse consumer needs.
The consultation includes the following key points and proposals:
- It clarifies expectations around NFM for all firms other than those that are not Part 4A permissioned.
- It proposes that the largest financial firms, those already required to publish their gender pay gaps, report representation on certain characteristics, for example disability status and ethnicity.
- It proposes that the metric for identifying a large firm is set at 250 employees and that this employee number is calculated on a solo entity basis.
- Nevertheless, it proposes that that all FSMA firms with a Part 4A permission with fewer than 250 employees, (excluding Limited Scope Senior Managers and Certification Regime firms) are required to report their average number of employees.
- It proposes that Dual-regulated CRR and Solvency II firms of any size must develop an evidence-based D&I strategy that takes account of their current progress on diversity and inclusion and that such a strategy should be easily accessible and free to obtain.
- It proposes that firms would be required to set targets to address underrepresentation at their firms.
- It proposes that firms publicly disclose their targets and their progress towards them annually.
- It proposes that information on targets would also need to be reported across the three layers of the board, senior leadership and all employees.
- It proposes that firms would be required to report on either the demographic characteristic of sex or that of gender, in line with FCA requirements for reporting on the diversity of boards and executive management.
- It proposes that firms collect data on the socio-economic background of their employees, based on the occupation of the primary household earner when the employee was aged about 14.
- It proposes that firms make available to them data on the diversity profiles of the UK population and the geographical area in which they carry out regulated activities in order that the firms can consider the context in which they operate.
The consultation stresses that the FCA does not want to impose a highly prescriptive approach to how firms “move the dial” on D&I, but that they expect firms to come up with their own solutions.
The proposals will necessitate amendments to, and the concept of non-financial misconduct being included within, the Senior Management Arrangements, Systems and Controls sourcebook the Code of Conduct sourcebook, the Threshold Conditions sourcebook, and the Fit and Proper Test for Employees and Senior Personnel sourcebook.
The FCA’s proposals will require firms to treat D&I as a risk issue and to take steps to improve their D&I profile. The proposals are intended to be flexible and proportionate, but compliance teams should be aware of the following key points:
- Firms will need to develop and implement a D&I strategy, including targets to address under-representation.
- Firms will need to collect and report data on certain characteristics of their workforce.
- Firms will need to have systems and procedures in place to manage non-financial misconduct, even when it occurs outside of the workplace.
A message to compliance officers
Compliance teams should start to consider the effect of these proposals now and develop plans for implementation. This includes assessing their current D&I practices, identifying any areas of under-representation, and developing systems and processes for collecting and reporting data. Compliance teams should also work with HR teams to ensure that their policies and procedures for managing non-financial misconduct are aligned with the new requirements.
The proposals are likely to create some challenges for firms, but they also represent an opportunity to improve their D&I practices and create a more inclusive workplace. Compliance teams should play a key role in helping their firms to implement the proposals successfully.
The consultation closes on 18th December 2023.
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