Diversity and inclusion (D&I) in the financial services and insurance sectors — the case for regulatory intervention

Environmental, Social and Governance (ESG) issues are becoming increasingly prominent features of business strategy, particularly in the financial services and insurance sectors. The broad reach of ESG initiatives includes conservation and biodiversity projects, corporate social responsibility programmes and increased compliance with domestic and international labour regulations. Research has shown that an interrelated ESG strategy lends itself to positive outcomes in risk management, healthy working cultures and innovation.

D&I reporting is a key focus under the umbrella of ESG in which regulators are taking an increased interest, not least because of the positive impacts on business growth and corporate governance. Indeed lack of diversity was highlighted as a prominent factor in the 2008 financial crisis with groupthink leading to corporate complicity and lack of accountability.

Nevertheless, there is much more work to be done to create organisations that are fully inclusive, can meet the needs of diverse clients and better understand the markets in which they operate. One such mechanism is by way of regulatory intervention, which we explore further in this article.

The Financial Conduct Authority (FCA) and Prudential Regulatory Authority (FRA) issued a joint discussion paper in 2021 (DP21/2) seeking to understand how financial services firms are designing and embedding D&I strategies, which opened a conversation between industry leaders in related sectors. The paper was complemented by the literature review on the impact of diversity and inclusion in the workplace and incorporated research from the Financial Lives 2020 Survey , which explored financial resilience following the COVID-19 pandemic.

Whilst it established that progress has been made, particularly through investors requiring firms to increase diversity at senior management and board levels, and the general Public Sector Equality Duty to enhance diversity and inclusion under section 149 of the Equality Act 2010, the rate of change has been slow. This is in part due to the fragmented approached created by sector-specific developments.

The FCA collated responses and launched its findings in a consultation paper (CP23/20) in September 2023. The majority of responses endorsed regulatory action to facilitate changing organisational cultures and structures and the FCA set out proposals to require certain FCA-regulated firms to:

• report their average number of employees to the FCA on an annual basis;
• collect, report and disclose certain D&I data;
• establish, implement and maintain a D&I strategy;
• determine and set appropriate diversity targets; and
• recognise a lack of D&I as a non-financial risk.

The requirements would differ depending on the size of the firm, and smaller firms with fewer than 251 employees would be exempt from many of the requirements. Furthermore, credit rating agencies, payment services and e-money firms with no Part 4A permission are excluded from all proposals. The FCA emphasised the need for firms to be flexible in generating solutions appropriate and proportionate to its own needs.

The Prudential Regulation Authority (PRA) responded to the consultation in October 2023 . Their consultation paper (CP18/23) is relevant to PRA-authorised banks and insurance firms, building societies and PRA-designated UK investment firms. The PRA also called for reporting on diversity and inclusion metrics, and their proposals would apply to Capital Requirements Regulation (CRR) firms and Solvency II firms.

Both regulators propose to introduce mandatory reporting for age, sexual orientation, disability or long-term health condition, ethnicity and religion, which are already collected by the majority of firms. The PRA also proposes firms collect data on parental and carer responsibilities, gender identity, and socio-economic background. For reasons of proportionality, the PRA decided to make collection of data on these characteristics voluntary rather than mandatory.

In relation to reporting on inclusion, firms may be required to answer questions, for example by way of an anonymous survey, including about the extent to which staff felt safe to speak up if they observed inappropriate behaviour or misconduct, or to express disagreement without fear of negative consequences.

Policy statements are expected in 2024 with a 12-month implementation period for firms. The proposals are estimated to affect over 45,000 firms, with the breakdown as follows:

[*] Excludes Limited Scope SMCR firms

Additionally, in response to an earlier consultation process, the FCA published the Listing Rules (PS22/3), which require listed companies to publish in their annual financial reports a statement on whether they have met specific board diversity targets. This is known as the ‘comply or explain statement’, and applies to accounting periods starting on or after 1 April 2022 (although earlier voluntary disclosure is recommended).

Non-compliance with reporting requirements would incur administration fees, followed by supervisory and enforcement powers from the regulators.

It is likely that the burden will fall to HR departments to collect the necessary data, draft and implement policies, design culture surveys and conduct regular audits and gap assessments. This will require significant investment of time and money, but should also be proportionate to the size and operations of the firm.

Our expert regulatory and employment teams can assist with such initiatives to support the compliance with the new regulations, provide training for staff and management as well as advise in the instance of breaches. For further guidance, speak to our experienced legal advisers.