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The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have launched a joint consultation paper, CP23/20, aimed at improving diversity and inclusion (D&I) within the UK’s financial services sector. It lays out key proposals for D&I strategy development and mandatory diversity reporting across larger firms, helping the sector adopt more structured approaches to inclusion. The consultation, which closed in December 2023, proposes significant regulatory updates, with the final policy statement expected in 2024, and the new rules taking effect 12 months after publication, likely by late 2025.
The proposals build upon the earlier DP2/21 Discussion Paper from July 2021, which first laid out the case for embedding D&I into the financial sector as part of the broader ESG (Environmental, Social, and Governance) agenda. The FCA and PRA have introduced these measures to ensure that firms adopt actionable and measurable D&I strategies, ensuring accountability and long-term cultural shifts.
The financial services industry has long been under scrutiny for its lack of representation, particularly at senior levels. Acknowledging the impact of diverse teams on innovation, risk management, and customer outcomes, the FCA has taken a bold step toward embedding D&I into the regulatory framework.
TABLE OF CONTENTS
Why Diversity and Inclusion Matter in Financial Services
Diversity and inclusion in financial services are essential not only from a moral standpoint but also from a business perspective. For firms in this industry, developing a clear D&I strategy for financial firms leads to better decision-making, better align with customer needs and expectations, reduced risks, and improved workplace culture.
Numerous studies show that diverse teams contribute to better decision-making, reduced groupthink, and more effective responses to complex challenges. Financial services firms that prioritise diversity are more likely to foster a culture of innovation and resilience, essential for navigating today's fast-changing markets.
For customers, D&I leads to improved understanding of their varied needs, which enhances trust in financial institutions. For the firms themselves, a more inclusive culture promotes employee well-being, increasing overall productivity and reducing risks associated with a narrow or uniform decision-making framework.
Key Challenges in Achieving Diversity and Inclusion
While many firms have implemented diversity initiatives, significant challenges remain. The FCA’s updated guidance includes new expectations for firms to address non-financial misconduct (such as bullying, harassment, and discriminatory practices), which will now be included in Conduct Rules and Fit and Proper assessments. This represents a broader regulatory approach where misconduct affecting workplace culture is viewed as a serious risk, just like financial misconduct.
Leadership Representation: Minority groups and women are underrepresented in senior management roles, contributing to homogeneous decision-making and limited perspectives.
Non-Financial Misconduct: Misconduct such as bullying and harassment, often overlooked, is prevalent in many institutions, leading to toxic work cultures. Financial regulators have typically focused on financial misconduct, but non-financial issues can be equally damaging. With non-financial misconduct now falling under the FCA’s Conduct Rules, firms are required to take this behaviour seriously and include it in Fit and Proper assessments.
Lack of Accountability and Data: Many firms have D&I policies without a mechanism for tracking or enforcing them. Without accurate data, firms struggle to measure progress or hold individuals accountable
Is Your Organisation Ready for FCA CP23/20 Compliance?
Let the experts at Aevitium LTD guide you through the development of a comprehensive diversity and inclusion (D&I) strategy that meets FCA CP23/20 regulations. From data collection and reporting to embedding D&I into your risk management framework, we’ll ensure your organisation is fully prepared for compliance.
Contact us today to strengthen your D&I framework, enhance decision-making, and foster an inclusive workplace culture.
How FCA CP23/20 Aims to Address These Issues
The FCA’s CP23/20 consultation outlines a comprehensive framework designed to tackle these core challenges and drive meaningful progress. Some of the key proposals include:
Non-Financial Misconduct: The FCA now views non-financial misconduct—such as discrimination, bullying, and harassment—as a key indicator of an individual’s suitability for leadership roles, reinforcing its importance in the key proposals of FCA CP23/20. The consultation expands the Senior Managers and Certification Regime (SMCR) to include non-financial misconduct in fitness and propriety assessments, aiming to hold individuals accountable for their behaviour both in and outside the workplace.
Mandatory Reporting and Data Collection: Larger firms (those with more than 250 employees) will be required to report on D&I metrics annually, in line with the FCA CP23/20 diversity reporting requirements. This includes providing demographic data on gender, race, age, and other protected characteristics, which will allow the FCA to monitor firms’ progress toward D&I goals. Firms that fail to meet these standards may face regulatory consequences.
D&I Strategy Development: Firms are required to develop and implement a D&I strategy overseen by their board. This strategy must include specific targets, a plan to achieve these goals, and regular progress assessments. The focus is on ensuring representation at the senior management level, as well as across the entire organisation.
Risk and Governance: CP23/20 emphasises the importance of treating diversity as a non-financial risk. A lack of diversity can lead to poor decision-making and groupthink, both of which are considered risks to business performance. The consultation paper suggests that firms integrate D&I into their risk management frameworks to mitigate these risks.
Feedback and Industry Reactions
Recent feedback from industry stakeholders has been largely supportive of the FCA’s CP23/20, recognising it as a significant step towards fostering a more inclusive financial sector. However, some concerns have been raised regarding the implementation for smaller firms, which are currently exempt from extensive reporting requirements.
The Pensions and Lifetime Savings Association (PLSA) highlighted the need for more clarity on how data reporting will translate into meaningful change and suggested extending some requirements to smaller firms to ensure comprehensive industry-wide progress.
Recent Updates and Next Steps
Following the close of the consultation in December 2023, the FCA is set to publish the final policy statement in late 2024. Firms are expected to comply with the FCA CP23/20 deadlines and compliance requirements by late 2025, including reporting mechanisms and board-level oversight of D&I strategies.
These new rules will come into force 12 months later, providing firms with ample time to prepare for the regulatory changes. Firms are encouraged to start building internal reporting mechanisms and ensure board-level oversight of their D&I initiatives. The FCA is also offering webinars, including one in October 2024, to guide firms through the regulatory expectations.
Firms will need to establish a formal D&I strategy, set specific diversity targets, and publicly report on their progress annually. The FCA emphasises that these strategies should be proportionate to the size and nature of the firm, ensuring flexibility while maintaining accountability.
Proportionality and Flexibility in Implementation
CP23/20 recognises that a one-size-fits-all approach is not appropriate for D&I initiatives. While larger firms are required to implement comprehensive reporting and accountability structures, smaller firms are exempt from certain obligations. However, these smaller firms are encouraged to voluntarily adopt D&I best practices to remain competitive and align with industry trends. This proportional approach ensures that the D&I strategy is aligned with the firm’s size, resources, and operations.
Intersectionality in Diversity Metrics
While the FCA’s framework focuses on traditional demographics like gender and race, it also encourages firms to consider intersectionality—the interconnected nature of social identities such as disability, socio-economic background, and sexual orientation. Firms are also encouraged to collect voluntary data on carer or parental responsibilities, which helps provide a more comprehensive understanding of workplace diversity. However, firms should be aware of the challenges that data privacy laws present in gathering this information, ensuring compliance while building employee trust.
Best Practices from Other Firms
Firms that have successfully navigated similar D&I regulations have implemented comprehensive employee resource groups (ERGs) and leveraged HR analytics platforms to track diversity metrics effectively. For example, a leading UK bank introduced an AI-driven recruitment tool that significantly reduced bias in their hiring process, resulting in a more diverse workforce and improved employee satisfaction scores.
Practical Steps for Firms to Comply
For firms looking to comply with FCA CP23/20 deadlines and compliance, a step-by-step approach is crucial. This includes data collection, target setting, and leveraging technology to meet the reporting requirements outlined by the FCA. Key steps include:
Data Collection: Start by gathering demographic data across all levels of the organisation. Use anonymous surveys to ensure accuracy and compliance with privacy standards
Target Setting: Establish realistic diversity goals, particularly at the leadership and senior management levels. Use the data collected to set time-bound targets and create accountability structures.
Training and Awareness: Implement unconscious bias training and workshops for employees and leadership. Create an inclusive culture by educating employees on the importance of diversity and non-financial misconduct policies.
Leverage Technology: Use technology tools, such as HR analytics platforms, to track D&I metrics and automate reporting. AI-driven recruitment platforms can also help minimise bias in hiring.
Implementation Success Stories
Several financial institutions have already implemented successful diversity and inclusion strategies that align with the FCA’s vision outlined in CP23/20. These firms offer valuable insights into how regulations can be put into practice effectively.
Case Study: HSBC’s Diversity and Inclusion Initiative
HSBC has been a frontrunner in D&I efforts within the financial sector, implementing a wide-reaching diversity strategy well before the FCA’s CP23/20 consultation. The bank established Employee Resource Groups (ERGs), which provide support networks for minority employees, including groups focused on gender, ethnicity, disability, and sexual orientation. By leveraging HR analytics platforms, HSBC monitors its progress toward D&I goals, allowing for transparency and accountability. As a result, the bank has seen a measurable improvement in employee satisfaction and an increase in the representation of underrepresented groups in leadership roles.
Case Study: Barclays’ Leadership Diversity Programmes
Barclays has also developed a diversity-driven leadership development program, focusing on promoting women and minority groups into senior management positions. The company introduced an AI-driven recruitment tool, which helps minimize bias in hiring decisions. By incorporating technology to reduce unconscious bias and implementing a clear D&I strategy, Barclays has enhanced its leadership diversity and improved overall workplace culture.
Cultural Transformation and Change Management
The FCA’s guidelines require not just policy implementation but a cultural transformation. Firms need to promote inclusion across all levels, integrating change management strategies that focus on leadership buy-in, employee engagement, and continuous learning. By fostering an inclusive culture, firms can create a more open and productive work environment that attracts diverse talent.
Insights and Industry Impact
The CP23/20 consultation paper is poised to bring about significant changes in how D&I is handled within financial services. By embedding D&I in the regulatory framework, the FCA is moving beyond voluntary initiatives to enforceable requirements. This shift ensures that firms not only acknowledge the importance of D&I but are held accountable for their progress.
The emphasis on non-financial misconduct signals that behaviour affecting workplace culture, even outside direct financial activities, will have tangible regulatory consequences. This approach aims to reduce harmful work environments and foster inclusive, equitable workplaces.
Additionally, by requiring firms to report demographic data and set diversity targets, the FCA is promoting transparency and creating a benchmark for D&I progress across the sector. This will allow for meaningful comparisons between firms and encourage continuous improvement.
More broadly, the introduction of CP23/20 is expected to set a precedent for other regulatory bodies globally, potentially influencing D&I practices beyond the UK’s financial services sector. As international firms observe the FCA’s approach, there may be a trend towards adopting similar D&I regulatory frameworks worldwide, promoting a more uniform standard of diversity and inclusion across the global financial industry.
Conclusion
The FCA’s CP23/20 consultation is a decisive move toward embedding diversity and inclusion into the fabric of financial services. By holding firms accountable for non-financial misconduct, mandating data collection, and requiring the development of strategic D&I plans, the FCA is driving tangible progress. As firms adapt to these regulations, those that prioritise diversity will not only comply with regulatory expectations but also position themselves for greater success in a competitive market.
Firms that embrace diversity are more likely to benefit from improved decision-making, innovation, and customer outcomes, making diversity an integral part of both risk management and business resilience.
Frequently Asked Questions About FCA CP23/20
To help address common concerns and provide a quick reference, here are answers to some frequently asked questions regarding FCA CP23/20.
What is FCA CP23/20? FCA CP23/20 is a consultation paper aimed at improving diversity and inclusion (D&I) within the UK financial services sector. It introduces new rules on D&I data reporting, the development of D&I strategies, and integrating non-financial misconduct into regulatory assessments like the Senior Managers and Certification Regime (SMCR).
When will it come into effect? The final policy statement for CP23/20 is expected in late 2024, with the new rules coming into effect 12 months after, likely by late 2025. Firms are advised to begin preparing for compliance now by setting up D&I reporting frameworks and ensuring board oversight.
Which firms are impacted by this new regulation? The new regulations primarily apply to UK financial services firms with more than 250 employees, who are required to comply with D&I reporting and strategy requirements. Smaller firms are encouraged to voluntarily align with these best practices to stay competitive and relevant in the industry.
How does FCA CP23/20 address non-financial misconduct? Non-financial misconduct, such as bullying, harassment, and discrimination, is treated seriously under CP23/20. It is included in Conduct Rules and Fit and Proper assessments to ensure that workplace behavior aligns with regulatory expectations. Firms are required to hold individuals accountable for both financial and non-financial misconduct.
What is required for D&I data reporting? Firms with more than 250 employees must report D&I metrics annually, including data on demographics such as gender, race, age, and other protected characteristics. This reporting will help the FCA monitor the progress of firms toward their diversity goals and ensure transparency in how firms are working toward inclusivity.
What role does the board play in FCA CP23/20 compliance? The board of each firm is responsible for overseeing the development and implementation of the D&I strategy. Boards are required to set specific diversity targets, regularly assess progress, and ensure that the D&I strategy aligns with broader business goals and risk management frameworks.
How will this impact smaller firms? Smaller firms are currently exempt from mandatory D&I reporting and extensive accountability structures, but they are encouraged to adopt D&I best practices. By doing so, smaller firms can enhance their competitiveness and align with industry trends even if they aren’t legally required to meet all the standards.
How does FCA CP23/20 integrate with the broader ESG agenda? It is part of the FCA's broader commitment to Environmental, Social, and Governance (ESG) standards. The paper primarily focuses on the "S" aspect, ensuring that D&I is not only a social responsibility but also a core component of good governance and long-term business resilience.
What are the penalties for non-compliance? While CP23/20 focuses on promoting cultural change, firms that fail to comply with D&I reporting or non-financial misconduct requirements may face regulatory sanctions, such as fines or other penalties, depending on the extent of the non-compliance.
What practical steps can firms take to prepare for this new regulation? To prepare for FCA CP23/20, firms should:
Begin collecting demographic data and assessing current D&I policies.
Set diversity targets for leadership and the broader workforce.
Train employees and leadership on unconscious bias and workplace inclusivity.
Ensure that the board has a clear oversight role in the development and execution of the D&I strategy.