CP23/20: FCA Announces New Diversity and Inclusion Reporting Requirements for all FCA Regulated Firms

On 25th September 2023, the Financial Conduct Authority (‘FCA’) published CP23/20 alongside the Prudential Regulation Authority (‘PRA’), which proposes a new regulatory framework on Diversity and Inclusion (‘D&I’) in the financial sector. By clarifying and strengthening its expectations surrounding non-financial misconduct across regulated firms, the FCA intends to create and maintain a sector that caters to the needs of a diverse consumer base. The FCA’s ESG agenda does not appear to be waning, with the regulator now turning to the social aspect of its long-term strategy for change. The new rules will be applicable to all firms with a Part 4A FSMA permission. The FCA proposes a minimum standard for in-scope firms, while large firms will be subject to additional requirements.

The minimum standards include:

  • Clarifying expectations on non-financial misconduct
  • Establishing reporting and disclosure requirements for larger firms

The FCA identify four key outcomes:

  • Healthier firm cultures
  • Reduced groupthink
  • New talent unlocked
  • Greater understanding of, and provision for, diverse consumer needs

The proposed framework aims to target these outcomes by giving firms a better understanding of regulatory expectations, however, the FCA clearly state that firms will remain free to determine their own D&I targets. The new Consumer Duty (‘The Duty’) requires firms to consider retail customers’ needs, objectives, and characteristics. The Duty and the FCA’s proposed rules are mutually reinforced. With greater D&I, there is an enhanced understanding of diverse consumer needs, therefore the outcomes for consumers and markets are improved.

 

Proposed New Rules Applying to all Firms

Table (4.1) outlines the FCA’s minimum standards for firms of any size:

Policy areasWhich firms the proposals will apply to
Non-Financial MisconductAll FSMA firms with a Part 4A permission and where relevant Threshold Conditions and existing chapters of the Handbook apply
Threshold ConditionsAll FSMA firms with a Part 4A permission and where relevant Threshold Conditions and existing chapters of the Handbook apply
Data ReportingAll FSMA firms with a Part 4A permission need to report their number of employees annually, excluding all Limited Scope SM&CR firms

The FCA propose to include non-financial misconduct within the following areas:

  • The Conduct Rules
  • Fit and Proper assessments
  • Suitability guidance on the Threshold Conditions

 

Proposed Rules for Large Firms and for CRR and Solvency II Firms of Any Size

Table (5.1) outlines the FCA’s proposals for large firms* and for CRR and Solvency II firms of any size:

Policy areasPolicy areas
D&I Strategies• Dual-regulated CRR and Solvency II firms of any size (firms to which the CRR or Solvency II parts of the PRA Rulebook apply)
• All other FSMA firms with a Part 4A permission who have 251 or more employees, excluding all Limited Scope SM&CR firms
• Data Reporting
• Disclosure
• Setting Targets
• Risk & Governance
All FSMA firms with a Part 4A permission with 251 or more employees, excluding all Limited Scope SM&CR firms

*Large firms are defined as firms with 251+ employees.

 

What Firms Must Do Now

The FCA request that firms respond to their questionnaire by 18th December 2023. Firms may find it useful to attend the FCA webinar on 30th October at 12pm, which will cover why D&I is a regulatory concern and give an overview of the regulatory D&I framework proposed.

Following the consultation period close date, the FCA will review and could adapt the CP based on feedback received, publishing its policy statement in 2024. The implementation date is expected to be 12 months thereafter. Crucially, this timeline allows firms to prepare for the new reporting and disclosure requirements ahead of their implementation but should not invite complacency.  Firms must begin preparation now by referring to the examples provided in the CP and initiating internal assessments of their D&I framework ensuring adequate time and resources are allocated. Mandatory disclosure forms can also be found in the CP, which firms should refer to as a checklist of data collection requirements ahead of their actual submission in 2025.

 

Conclusion

Although in its early stages, D&I reporting requirements are essential for the FCA in furthering its ESG agenda. The backlash received from the regulator’s previous environmentally focused endeavors has not deterred them from enforcing more powers over firms. Despite the FCA currently proposing that firms will be able to set their own D&I targets, it remains unclear whether this could change in future and how the FCA will oversee/scrutinize this. Most respondents from the DP noted that the ‘tone from the top is essential’. The FCA and respondents agree that company culture is crucial to improving D&I and fostering a healthy workplace.

 

How Complyport can help

In navigating the evolving landscape of diversity and inclusion in the financial sector, Complyport stands ready to assist regulated firms in meeting the FCA’s new CP23/20 proposed requirements. Our expertise in regulatory compliance and our commitment to promoting healthier firm cultures align with the FCA’s objectives. Complyport can help firms:

  1. Clarify expectations on non-financial misconduct
  2. Establish robust reporting and disclosure mechanisms
  3. Ensure adherence to the proposed rules

We understand that fostering diversity and inclusion is not only a regulatory necessity but also a strategic advantage in today’s market. As the FCA’s timeline unfolds, Complyport will continue to support firms in their journey towards a more inclusive and responsible financial industry.

Contact us today at thomas.salmon@complyport.co.uk  to discuss how our services can be tailored to meet your specific needs.

 

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