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Diversity and inclusion in the financial sector – working together to drive change


The Bank of England, Prudential Regulation Authority and Financial Conduct Authority (referred to jointly as the Regulators in this article) published a joint discussion paper (Discussion Paper) on 7 July 2021, DP 21/2 (here) , in which they set out their ambitions and proposals for enhancing diversity and inclusion in the financial services sector. The Discussion Paper is open for comment until 30 September 2021.

The Regulators acknowledge that the financial services sector has taken steps forward in relation to diversity and inclusion but considers that there is much more that needs to be done in order to create truly diverse and inclusive organisations that meet the needs of those the industry serves. This topic is also considered critical by the Regulators to its work on culture and governance, and boards and senior management are expected to take note.

  • The Regulators believe that greater diversity and inclusion across the industry will benefit the financial services sector in several ways including:
  • First, by enhancing customer outcomes through encouraging the development of products, services and communications that more closely represent the needs of those they serve; and
  • Secondly, by promoting financial stability and soundness.

This first outcome builds on the work undertaken recently by the Financial Conduct Authority (FCA) around the treatment of vulnerable customers and the FCA’s proposed new consumer duty. The second outcome builds on the Regulators’ view that broadening the range of ideas and approaches is important in contributing to the stability, fairness and effectiveness of the firms, markets and infrastructure and supports the Regulators’ objectives set by Parliament. 

By diversity, the Regulators focus principally on what they term “cognitive diversity”, that is diversity of thought. The Regulators propose defining diversity of thought as:

“bringing together a range of different styles of thinking among members of a group. Factors that could lead to diverse thinking could include, but not limited, to different perspectives, abilities, knowledge, attitudes, information styles, and demographic characteristics of any combination of these.”

There are parts of the industry where products and services provided to customers fail to meet the needs of disadvantaged groups. The definition of diversity is wide and encompasses aspects that go beyond the protected characteristics enshrined in the Equality Act 2010. This is a deliberate move, designed to foster a more diverse environment in which the views of the diverse participants are encouraged. However, diversity alone is not enough. Inclusion is key to allowing diversity of thought to flourish so that everyone feels involved, valued and treated fairly. The Regulators expect firms to develop their internal cultures so that these aspects are embedded into the same so that no one is fearful of speaking out or being shut down. The Regulators hope that this move towards both diversity and inclusion will enable the industry to create improved products, services and communications that are more aligned to the needs of their customers.   

The Discussion Paper explores various measures that the Regulators may implement in order to foster more diverse and inclusive practices amongst those they regulate. This article explores at a high-level, a number of the proposals. The article is not exhaustive and not all the proposals set out in the Discussion Paper have been covered here.

Data collection: regulatory reporting

The Regulators have identified that key to understanding the current state of play, and monitoring progress in this area and the potential barriers to improving further diversity and inclusion is going to be the collection of accurate data. As such, the Regulators are considering requiring firms to report on diversity and inclusion within their business as part of their regulatory returns. The Regulators believe that data supplied may be able to identify areas where intervention is required or where supervision may be necessary. Regular and accurate data collection should also assist firms in holding themselves to account.

Later in the autumn the Regulators are intending to run a one-off voluntary pilot data collection exercise to determine what data firms already have in this area and to inform the development of future data collection exercises.  

Diverse representation of senior management

Senior management is visible to all employees, consumers and wider society and is instrumental in setting the tone of the firm. Diversity at senior management level demonstrates equality of opportunity and provides role models for underrepresented groups. For these reasons, the Regulators believe that future regulatory initiatives should have a focus on the diversity of senior management and the progress firms are making.

In order to ensure consistency of approach across the industry the Regulators are considering developing a definition of senior management. This, they hope will enable the Regulators and firms themselves to monitor diversity and assist in benchmarking between peers.

However, diversity is considered to be important at all levels and firms will be encouraged to think about diversity at all levels with the organisation. Firms will need to reflect on practices aimed at improving diversity and inclusion and consider how these can be embedded into their recruitment and succession planning practices.

With this aim in mind the Discussion Paper is seeking the views of financial services firms of the merits or otherwise of the Regulators specifying targets for underrepresented groups in the senior management population and customer facing roles.

Senior Managers and Certification Regime

As is often expected with Regulatory initiatives, tone from the top is seen as critical. Boards will be expected to hold management to account for promoting a diverse and inclusive culture across the business. One of the tools that the Regulators are exploring to facilitate this is by expanding the PRA prescribed responsibilities[1] that relate to culture so that they capture diversity and inclusion. The senior manager holding these prescribed responsibilities will be held accountable for progress the firm makes or fails to make in enhancing diversity and inclusion. For those firms where these prescribed responsibilities do not apply an appropriate senior manager will be expected to take on the responsibility for diversity and inclusion and set this out in their statement of responsibilities.

A second area of proposed change is in relation to fitness and propriety assessments. The Regulators are considering developing guidance so that evidence of bullying, sexual harassment and discrimination are factors that the Regulators take into account when approving senior managers and that firms should consider when carrying out their own internal fitness and propriety assessments.

The Regulators hope that enhanced guidance as to what constitutes non-financial misconduct and the factors that should be considered for these purposes will provide increased consistency of approach across the industry. In addition to including non-financial misconduct into fitness and propriety assessments, firms would also be expected to consider if evidence of such behaviour amounted to a conduct rule breach and whether it would need to be disclosed in a regulatory reference.


The Regulators believe that linking diversity and inclusion practices to remuneration will be another tool that may enhance diversity and inclusion in the sector. With this aim in mind the Regulators are proposing new rules that will facilitate firms to use progress in diversity and inclusion as one of the non-financial metrics that are considered when awarding variable remuneration. The Regulators want to explore building on the steps some firms have already taken in this area, for example, by including measures that promote diversity and inclusion to the personal objectives of senior management. Poor performance in this area could, for example, be used as a ground for adjusting a variable award downwards.

Secondly, the Regulators are looking to develop rules that ensure that the remuneration committee, or where there is none, the board, ensure that remuneration policies do not give rise to discriminatory practices.

Diversity and inclusion policy

Finally, the Regulators are considering requiring all firms to have a diversity and inclusion policy available on their website. The Regulators believe that the policy should form the central foundation to the firm’s strategy and action plan and set out the expectations of all staff on what diversity and inclusion means within their organisation. The Regulators consider that requiring a firm to publish the policy demonstrates commitment and will enable stakeholders to hold the firm to account.

To be functioning and to achieve the principal aim, any such policy would need to be meaningful and would therefore need to have clear goals and objectives. Helpfully, the Regulators do recognise that a one size does not fit all and consequently are indicating that they will apply a proportional approach to any such obligations on businesses.

Concluding remarks

The industry has made some progress, particularly in reducing the gender gaps within the industry but it is clear that the Regulators consider that the financial services sector has a long way to go before it can hold itself out as being truly diverse and inclusive. In parts of the industry, we continue to see wide pay gaps between genders, ethnic and socioeconomic groups and in parts of the sector there continues to be a lack of diversity at senior levels. Additionally, products and services do not always meet the needs of disadvantaged groups. Progress is going to require collective commitment from all those involved in the sector and the Discussion Paper sets out the first steps towards this.

We have seen recent ESG initiatives gaining traction over the last few years but with these, the focus has been largely at the products and services provided by firms. Diversity and inclusion is, in contrast, more of an inward looking exercise in which firms will need to reflect on their own practices, governance arrangements and culture. We very much expect that, in order to meet their objectives of enhancing diversity and inclusion in the sector, the Regulators will increase their own scrutiny of firms’ policies and procedures in this area and are likely to renew and enhance their focus on this area going forwards.

[1] PR (H): responsibility for overseeing the adoption of the firm’s culture in the day-to-day management of the firm); and PR (I) responsibility for leading the development of the firm’s culture by the governing body as a whole

If you require further information about anything covered in this briefing, please contact Katy Ruddell or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, September 2021

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About the authors

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Katy Ruddell

Senior Counsel

Katy is a highly experienced financial services lawyer whose work focuses on conduct of business issues, regulated lending, mortgages and the Senior Managers and Certification Regime (SMCR). Her clients include leading private banks, wealth managers and asset managers.

Katy is a highly experienced financial services lawyer whose work focuses on conduct of business issues, regulated lending, mortgages and the Senior Managers and Certification Regime (SMCR). Her clients include leading private banks, wealth managers and asset managers.

Email Katy +44 (0)20 3375 7343
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