Diversity and Inclusion policy changes are coming - ​Sarah Jackman

The consultation period for the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) diversity and inclusion (D&I) proposals in financial services has concluded. With these proposed changes, the UK is set to spearhead global adoption of D&I as a regulatory issue. Regulators are striving to promote D&I as a means to enhance psychological safety, understand and address customer needs, expand talent pools, discourage groupthink and drive cultural change.

There has been significant engagement with the proposals, although it seems unlikely the fundamental elements will shift. The regulators’ dedication to fostering change is unwavering.

A challenging aspect for firms with 251 or more employees is mandatory demographic reporting. The FCA/PRA proposals would require them to collect data on employees’ dates of birth, sex/gender, disability/long-term health conditions, ethnicity, religion and sexual orientation, albeit allowing a “prefer not to say” response. Voluntary reporting is encouraged on further characteristics, such as socio-economic background.

Compliance with data protection requirements will be paramount as firms adjust data recording practices. This complex transition will require a careful approach to maintain legal compliance.

Sarah Jackman is Employment Counsel, Dentons

The proposals would require firms to scrutinise data on employee demographics and the diversity profile of areas in which they operate. This comparison is crucial to identify gaps and build out a D&I strategy and targets for change.

The proposals extend to mandating specific questions in employee surveys to measure sentiment on inclusion and culture. Specific “inclusion questions” must be replicated in these surveys, which might disrupt global firms with a UK presence. Other firms might not be geared up to monitor inclusion in this way.

It’s anticipated firms will need to make relevant D&I targets public, along with their progress. Diversity targets also present potential conflict with employment law. The lawfulness of appointing someone based on protected characteristics is restricted, prompting a need for different approaches to working towards diversity targets. Firms must manage this tension carefully to avoid unintentional discrimination.

While general positive action is permissible in certain circumstances, positive discrimination remains unlawful in most situations in the UK. Positive action is limited to tiebreak situations in recruitment or promotion, provided it is proportionate to addressing disadvantage or underrepresentation.

To mitigate discrimination risks, firms should establish open communication between HR and D&I leads. Targets should align with broader D&I strategy and address specific underrepresentation issues. They should be benchmarks for progress rather than quotas. Transparency in appointment and promotion decisions is essential, and strategies should promote applications from underrepresented groups without crossing into discrimination.

There is apprehension that the prescriptive approach to measuring diversity overshadows meaningful change towards inclusion, a greater social and economic priority.

Finally, the complexity of provisions on non-financial misconduct has been a concern, indicating a tension between regulatory requirements and employment law. Our caseload highlights a pressing need to eradicate outdated behaviours and establish more inclusive work environments. In some firms, despite known issues, inaction remains prevalent. This can cause employees to leave rather than voice their concerns, yet the same individuals are often then willing to share details in the context of litigation.

As we await the outcome of the consultation, firms must prepare for proposals being implemented in 2025. This preparation involves legal diligence, stakeholder engagement across business units, strategic planning and commitment to genuine D&I progress without contravening employment law.

Sarah Jackman is Employment Counsel, Dentons