Diversity and inclusion placed front and centre in new financial misconduct rules - Gillian MacLellan

Last month, the UK financial regulators progressed plans to boost diversity and inclusion (D&I) across the sector. The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) each published consultation papers which set out proposals to boost diversity and inclusion (D&I) to support healthy workplace cultures, reduce groupthink and unlock talent across the sector.

The key aim is to reduce discrimination and other forms of non-financial misconduct across an industry which employs around 160,000 people in Scotland and contributes £13.6bn towards the nation’s economy every year.

The regulators’ focus goes beyond gender and ethnicity, where there has been progress, and extends to other characteristics such as disability, age, parental and carer responsibilities and socio-economic background.

Among the key FCA proposals is to expressly include non-financial misconduct in its ‘fit and proper’ test and conduct rules for senior managers. The conduct rules will be expanded to better address instances of bullying, harassment and similar behaviour towards fellow employees and those of group companies and contractors and to provide guidance on deciding whether misconduct is serious enough to amount to a conduct rules breach. Guidance on how non-financial misconduct is relevant to fitness and propriety will also be added to the FCA’s rules.

Gillian MacLellan is a partner and employment law specialist at CMS

Meanwhile, large firms with over 250 employees will be required to develop an evidence-based D&I strategy which must be communicated to their staff and made publicly available. The strategy must include objectives and goals, a plan for achieving these, and details of how they will be measured.

The PRA consultation paper, relevant to authorised banks, insurance firms, building societies, and designated UK investment firms, also requires companies to have a D&I strategy. This will need to include a firm’s core values, its workplace culture aspirations, and clear, measurable objectives and goals for improving D&I. Smaller firms would be expected to develop shorter and simpler strategies.

These proposed reforms provide further clarification over the regulators’ commitment towards addressing non-financial misconduct and reflect the view of the FCA’s former interim CEO, Christopher Woolard, that “non-financial misconduct is misconduct, plain and simple.”

The publication of guidance on what may constitute non-financial misconduct and amount to a breach of the conduct rules will be welcomed by firms which previously had to set their own bar over such matters. Firms will however still have to apply their own judgement and consider key factors in each case of a potential breach including whether improper conduct has been repeated and the seniority of the individual whose conduct is in question.

The consultation period closes on 18 December and the regulators hope to bring new rules into effect by 2025. Once implemented, it will be important for firms to be able to demonstrate how they’ve reached decisions over non-financial misconduct issues and to clearly set out the resulting actions and lessons learned.

While the FCA and PRA are taking different approaches when it comes to individual accountability, these consultation papers share a common interest of improving D&I within financial services in order to deliver meaningful and lasting change.

Gillian MacLellan is a partner and employment law specialist at CMS