Regulators rethink diversity rules

The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have decided not to move forward with proposed stricter diversity and inclusion rules for financial services firms, instead opting to streamline obligations to avoid duplication and unnecessary costs.

Lucy Blake (pictured), Partner at Jenner & Block, said that read in context, the decision by the FCA and PRA does not signal a volte-face from their commitment to tackling diversity and non-financial misconduct in the workplace – in fact it is an attempt to streamline the obligations on UK businesses expressly in order to avoid duplication and unnecessary costs.

The FCA and PRA’s decision to pause diversity, equity and inclusion (DEI) reporting requirements and take more time to assess non-financial misconduct rules was not unexpected, particularly given recent comments from the heads of both regulators about reducing overlap with other legislative measures. However, Blake stressed that this does not mean UK businesses are off the hook when it comes to DEI and non-financial misconduct because they are – or will be – subject to these new and proposed laws.

Both regulators have pointed to existing and forthcoming legislative requirements, including gender, disability and ethnicity pay gap reporting for companies with more than 250 employees, as well as the new duty on UK employers to take reasonable proactive steps to prevent sexual harassment in the workplace. The FCA and PRA also referenced the UK Procurement Act 2023, which allows contracting authorities to consider non-financial criteria such as social value when awarding public contracts and provides powers to bar government suppliers based on integrity concerns.

Despite the decision to halt specific DEI rules, both authorities reiterated their support for voluntary industry initiatives, emphasising that diversity and inclusion play a key role in governance, decision-making and risk management. The PRA also warned that it remains alert to the risks of groupthink within firms and will continue to assess this through existing supervisory frameworks.

The regulators have confirmed they will publish further steps on non-financial misconduct by the end of June, stating that failings in governance and culture can feed through into failings in consumer protection and market conduct. Chief Executive of the PRA, Sam Woods, also left open the possibility that new rules could be considered after the implementation of any broader legislative changes in this area.

While the immediate regulatory burden may be reduced, UK businesses are still expected to maintain a strong focus on diversity, inclusion and workplace culture as part of their long-term commitments.