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Top financial services enforcement trends: diversity and inclusion

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Burnett Calum
Calum Burnett

Partner

London

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Hitchins Sarah
Sarah Hitchins

Partner

London

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David McMenamin

Associate

London

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23 February 2022

Although only 18% of the UK Financial Conduct Authority’s (FCA) final notices issued to firms over the last two years have expressly referred to poor culture in a firm, this does not mean that the FCA and the Prudential Regulation Authority (PRA) have gone quiet on this topic; far from it.

Diversity and inclusion 

The FCA delivered three speeches in January and March 2021, setting out its overarching intentions with regard to diversity and inclusion. These were followed by the publication of a joint FCA, PRA and Bank of England discussion paper outlining the regulators’ specific aims. 

The collective ambition of the FCA, the PRA and the Bank of England is to create safer and sounder firms with better internal governance and risk management, delivering products and services that meet the needs of their consumers. They see improving diversity and inclusion in the financial services industry as a key ingredient to achieving this ambition. Although their discussion paper recognises that the financial services industry has taken steps forward, the regulators are united in saying that there is much more to be done in order to create truly diverse and inclusive organisations that meet the diverse needs of customers.

Taking statements made in relevant publications into account, we predict increased scrutiny from the regulators on the following. 

  1. The extent to which senior leaders are fostering an inclusive culture and a safe environment where employees can speak up.
  2. Board monitoring and challenge in relation to progress around diversity and inclusion, both in the firm’s construct and in the way that it does business.
  3. Linking diversity and inclusion to the personal objectives of senior managers or variable remuneration awards (or both) to the extent that this is not already the case.
  4. Considering whether approving an application for an individual to perform a senior manager role is conducive to the diversity of the relevant firm’s senior management team (with the risk that the FCA and the PRA will start to challenge, or even decline, individual applications where they consider there to be insufficient diversity among their senior management team).
  5. Potential adverse fitness and propriety findings being made as a result of an individual’s conduct with respect to diversity and inclusion issues. The FCA and the PRA have indicated that they may provide firms with further guidance on this topic in the future, as this is an area that many firms are already grappling with when considering ‘non-financial misconudct’.

Aside from cases involving specific allegations of non-financial misconduct and firms’ handling of those allegations, diversity and inclusion issues are less likely to form the basis of standalone enforcement investigations at least in the near future. Instead, it is much more likely that the FCA and the PRA will incorporate diversity and inclusion issues into their investigations by questioning whether issues in these areas (eg a lack of diversity and inclusion) contributed to an issue or breach arising. It is possible that we will start to see these types of points being included in final notices, cited as root causes for breaches of regulatory requirements.

See also our blog on Senior managers’ obligations: diversity and inclusion in financial services

This post is based on an article "FCA and PRA Enforcement Action: Trends and Predictions" which first appeared in the January edition of PLC Magazine and a copy of the full article is available here and on the PLC Magazine website.

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