FCA & PRA drop mandatory DEI reforms

The UK’s two top financial regulators, the FCA and the PRA, have announced they will not be proceeding with plans requiring firms to disclose more about their diversity and inclusion policies. The plans have been dropped in response to criticism that they would add an onerous reporting burden for firms and create overlap with government proposals to legislate in this area. If the plans had gone ahead, firms would have been required to publish an EDI strategy, set EDI targets, and collect and report on certain data. 

This has been widely reported in both the mainstream and HR press with the FT and People Management covering the news. In a letter sent to Dame Meg Hillier MP, chair of the Treasury Select Committee, Nikhil Rathi, chief executive of the FCA, stated that the regulator did “not currently plan to publish new rules on diversity and inclusion” but “will continue to support voluntary industry initiatives.” He also acknowledged that the government was planning to introduce mandatory disability and ethnicity pay gap reporting, expressing concerns over “duplication and unnecessary costs” if the regulator were to proceed with its own proposals. Similarly, Sam Woods, the CEO of the PRA, said in his letter that implementing the proposed reforms would lead to duplication and unnecessary costs for businesses. 

As the FT points out, the regulators’ decision mirrors a rapid retreat by US companies from EDI initiatives, with President Donald Trump signing an executive order banning EDI measures within the federal government within days of taking office. Paul Sesay, CEO and founder of Inclusive Companies, told People Management: “Global businesses wanting to keep on message with their US counterparts may feel they’ll lose business if they don’t follow suit.” 

So, clearly this is a significant development so let’s get reaction to it. Anne Sammon advises a number of clients in the FS sector and I asked her she was surprised by the announcement:

Anne Sammon: “The rationale that they've given is that there are a number of upcoming changes that will overlap with some of the proposals that they'd made. The proposals that they'd originally made included things like mandatory reporting on numbers of employees with certain protected characteristics, as well as some other data. The FCA and PRA seem to be taking the approach that the government's proposals around mandatory pay reporting for disability and race would potentially overlap with those, and that seems to be the stated rationale. It's difficult to know what the real motivation is because there has been a bit of a backlash against the regulator in overstepping and looking at things that aren't purely financial misconduct-type issues.”

Joe Glavina: “Can I ask you about what might be behind this sort of broader political and economic factors at play here including developments in the US under Donald Trump. Of course, there are lots of US companies with a presence in the UK and vice versa. Do you think what’s happening in the US is a factor?”

Anne Sammon: “I suspect it's a factor in the decision but I would expect It's not the only factor and it's probably not the major factor. I suspect that part of this is a feeling of government pressure that they don't want to be overstepping and getting into things that are more politically driven. Also from a from an economic perspective, we know that the growth forecast was slashed and therefore there is pressure around allowing firms to kind of prosper economically, and a sense that if there are too many rules around everything that potentially removes competitive advantage from firms that are operating in the UK.”

Joe Glavina: “How do you see firms in the FS sector reacting to this, Anne?” 

Anne Sammon: “I think there's likely to be a whole range of responses. Some firms will see this as their opportunity to use DEI as a competitive advantage and to really push the fact that they are embracing DEI initiatives and other firms may go completely the opposite way and decide that they are going to cut back every DEI programme that they have. I think we just have to wait and see how big an impact that has. We've also heard anecdotally of firms who aren't intending on making any changes to their DEI programmes but have decided publicly to maybe row back on some of the public statements on their websites, whereas internally, from an employee perspective, everything is business as usual in the same way it was six months ago.”

Joe Glavina: “So those firms in the second category that you mentioned, the firms cutting back on their DEI programmes, the risk is that will lead to a reduction in transparency and accountability which could lead to problems. Are we flagging this to clients?” 

Anne Sammon: “We are talking to clients about these issues. I think one of the things is this is just one of many things that you have to consider if you're an employing entity around how you treat your staff. It's not so much necessarily having formal programmes on these things, but if you end up in employment tribunal litigation then quite often there will be questions around how do you work out who you're paying, the amounts that you're paying, who receives a bonus, how that's calculated, and we are seeing increasing numbers of claims within the FS sector on discrimination and related issues, including pay discrimination. So firms still need to ensure that they have some internal transparency or, at least, management transparency, around how decisions are made so that in the event of litigation they have the paper trail to be able to defend that litigation.”

Joe Glavina: “What about the future direction for DEI regulation in this sector, Anne. Could we see a return to the idea of mandatory DEI reporting in the future do you think?”

Anne Sammon: “I wouldn't rule it out and we are expecting mandatory reporting on pay around disability and race, potentially, from a government perspective rather than a regulatory perspective. I think at the moment it's fair to say the regulatory agenda is quite packed and it may just be that in terms of prioritising time, the FCA and PRA have decided that they have more pressing priorities and that maybe in 12 months, 24 months, time that changes.”

Joe Glavina: “Final question Anne. How should firms in the sector approach DEI now given this shift in regulatory focus by the regulators?” 

Anne Sammon: “So my advice would be, there shouldn't be any change. The regulatory expectations haven't really changed. It's more that there won't be these mandatory reporting obligations going forwards but that doesn't mean that if a firm finds itself in multiple discrimination claims, or multiple whistleblowing claims, that the regulator won't ask difficult questions and the data that you would have in order to answer those questions is exactly the type of data that the FCA was asking firms to gather.”

The People Management article I mentioned earlier is called: ‘Like dominoes falling: what does City regulators’ U-turn on new EDI rules mean for inclusion in the UK?.’ We’ve included a link to it in the transcript of this programme.

- Link to People Management article: ‘Like dominoes falling: what does City regulators’ U-turn on new EDI rules mean for inclusion in the UK?’