Diversity and Inclusion in the UK Financial Sector - The UK Regulators' Proposals

August 17, 2021


In this Onpoint, we report on the recent discussion paper: “Diversity and inclusion in the financial sector – working together to drive change” (DP21/2)  (the Discussion Paper) recently issued by the Bank of England (the Bank), the Prudential Regulation Authority (PRA), and the Financial Conduct Authority (FCA) (the Regulators) to canvass the financial sector and other stakeholders on their approach on sector wide diversity and inclusion (D&I) initiatives. Firms and other interested parties can respond to the various consultation questions set out in the Discussion Paper until 30 September 2021. 

Regulatory Objectives and Scope

The objective of the D&I initiatives proposed by the Regulators is to ensure that the financial system is better able to support the economy through well-run firms which can meet the diverse needs of their customers. The Regulators seek a resilient financial services sector which brings together and responds to different views and perspectives so that concerns are raised, and decisions challenged effectively. Diversity and inclusion are seen as reducing “groupthink” and encouraging debate and innovation, thereby improving outcomes for consumers and across markets and supporting financial stability. 

The purpose of the Discussion Paper is, amongst other things, to enable the Regulators better to understand from financial firms and other stakeholders how the Regulators can accelerate the pace of meaningful change and what role they can most usefully play to support that change, whilst also recognising the need for collective commitment and leadership from firms on D&I issues. Whilst gender has historically been the focus of diversity initiatives, it is recognised that there is an imbalance in the extent to which other aspects of diversity, including intersectionality, have been addressed. In addition, throughout the Discussion Paper the Regulators are keen to emphasise that any measures introduced should not result in a box-ticking exercise.

The proposals addressed in the Discussion Paper will apply to the whole financial services sector including: 

  • firms authorised under the Financial Services and Markets Act (FSMA) and regulated jointly by the PRA and FCA or solely by the FCA;
  • payment services and e-money firms regulated by the FCA;
  • credit rating agencies and recognised investment exchanges regulated by the FCA; and
  • financial market infrastructure firms regulated by the Bank.

In developing their policies the Regulators will address the specific position of small firms (such as small intermediaries, small payments firms, small insurers, and other small firms) as well as overseas firms operating in the UK (for example, through branches). Further discussion specific to FCA listed firms is expected in the coming months.

The Regulators are considering the extent to which overseas firms providing services in the UK should be subject to the D&I proposals, noting that governance is typically outside the UK and culture is influenced by the wider group based outside the UK.


Importantly, the Discussion Paper notes that the imposition of any rules or regulations will need to be proportionate to the size and complexity of the firms and institutions falling within the ambit of any guidance or regulation, with greater flexibility and lesser regulatory burdens for smaller institutions. A “one size fits all approach” will not be applied. The Regulators welcome feedback on the appropriate approach to proportionality.

Existing Framework

The Regulators note that the current framework of regulatory rules regarding D&I has largely developed on a sector-specific basis and is therefore fragmented across the industry. At present, explicit D&I-related requirements tend to focus on banks, building societies, investment firms, insurers, and Central Securities Depositaries and subject to their size. Many of these requirements take the form of composition-based requirements to ensure diversity at Board level. For example, firms with nomination committees must set targets for underrepresented genders on the Board and a policy to remediate any imbalances. The PRA and FCA require UK banks, building societies and investment firms to “engage a broad set of qualities and competences when recruiting members of the management body [Board] and for that purpose put in place a policy promoting diversity of the management body [Board].”

The diversity discussion has also started to focus on remuneration. CRD V contains provisions relating to gender neutral remuneration policies and practices. 

Diversity and Inclusion in the context of the Discussion Paper

The focus of the Regulators is on “diversity of thought”, recognizing how different perspectives, skills, abilities, knowledge, attitudes, and information styles, or a combination of these, inform the approach to solving problems. These characteristics can be visible and measured (such as gender, age and ethnicity) or non-visible (such as disability, sexual orientation and education) and are not limited to those protected by the Equality Act 2010. They can also include other factors such as socio-economic diversity, gender (including where it does not coincide with sex), and cultural background and intersectionality.

The importance of inclusion – defined within the Discussion Paper as the practice or policy of providing equal access to opportunities and resources for people who might otherwise be excluded or marginalized, for example due to demographic characteristics - is also recognised. The Regulators note that in an inclusive environment all individuals should be able to participate fully, including being able to speak freely without fear and to show diversity of thought without the expectation that they will conform to arbitrary cultural conventions. The Discussion Paper also views a culture of psychological safety as important for fostering inclusion.

Core proposals

The Regulators’ proposals focus on:

  • implementing effective measures to collect data so that progress can be tracked more meaningfully; and
  • introducing measures for improving culture and policy within financial institutions and other stakeholders. 

The policy proposals under consideration include:

  • regular reporting of diversity data;
  • the use of targets for representation;
  • making senior leaders directly accountable for D&I in their firms;
  • linking remuneration to D&I metrics;
  • requiring a D&I policy, training on D&I and diversity audits; and
  • considering D&I as part of the approval process under the Senior Managers & Certification Regime (SMCR). 

Data collection

The Regulators are contemplating introducing monitoring and reporting requirements for firms with regards to their D&I progress and policies. The Regulators believe that data collection can assist in:

  • identifying areas for policy and supervisory intervention;
  • supporting evidence-based policy making;
  • monitoring progress and change; and
  • firms holding themselves to account.

The Regulators intend to conduct a voluntary pilot survey in the Autumn of 2021 across a representative selection of firms seeking better to understand the type of data currently collected and as part of this will consider the practicality of collecting any data it may require in the future. Firms will also be asked to provide aggregated and anonymised data that they already hold.

Future reporting obligations would be based on the Equality Act 2010 protected characteristics together with socio-economic background for different categories of staff and the Regulators’ initial aims for regular future data collection obligations would be:

  • Board and executive committee composition;
  • demographic diversity of the Board, Senior Managers (under the SMCR), and the workforce more widely;
  • whether there are any internal diversity targets and progress against them; and
  • high level firm wide data on demographic diversity characteristics and inclusion practices.

Tone from the top - culture, leadership, and governance

The Discussion Paper addresses the following key issues in relation to culture, leadership, and governance:

Leadership and culture

The Discussion Paper notes that leaders will need to set a compelling strategy and empower managers to develop and implement initiatives that deliver cultural change. They will need to set goals, monitor the effectiveness of change programmes, identify barriers, and make changes where necessary. The Discussion Paper also notes that establishing inclusive cultures will be critical to progress. 


The Regulators will expect Boards to hold management to account for promoting diversity and an inclusive culture and to be responsible for setting D&I strategy and policy and overseeing its progress. 

Diversity should be a key consideration in respect of the Board recruitment strategy. In terms of Board succession, appointments should be considered in the context of diverse representation and the Regulators may in the future introduce explicit rules or guidance in this respect. 


The Regulators will consider whether the Board gender target requirements which currently apply to significant banks, investment firms, and some financial market infrastructure firms should also apply more widely than currently, and whether such target requirements should be introduced in relation to other diversity characteristics. 

Individual accountability

The Regulators believe that making senior leaders directly accountable for D&I in their firms would drive strategic thinking and discussion among key decision-makers. The Discussion Paper makes various suggestions linked to SMCR in this regard (although it notes that SMCR does not apply to all firms).

Dual regulated firms – the Regulators propose that, in relation to firms which have ‘prescribed responsibilities’ relating to firm culture under the SMCR, it should be made clear these responsibilities encompass responsibility for the implementation and execution of the firm's D&I strategy. For firms which do not have prescribed responsibilities for culture, this responsibility could be covered in the appropriate Senior Managers’ statement of responsibilities. 

Solo-regulated firms - The FCA expects all Senior Managers to take responsibility for developing and embedding healthy cultures in their areas of responsibility. The FCA expects that this responsibility would generally fall to the holder of an existing Senior Management Function (SMF), such as the chairs of the nominations and remuneration committees. The FCA would like to explore express allocation of responsibility for elements of D&I policies to Senior Managers, rather than including them in their general wider responsibilities. 


The Regulators state that linking progress on D&I to remuneration is seen a potential key tool for driving accountability in firms and incentivising progress. The Discussion Paper notes that firms are increasingly linking D&I to the personal objectives of senior management – for example, through remuneration scorecards. The Regulators are considering developing guidance on how metrics linked to advancing D&I could be used as part of non-financial criteria, with poor performance providing grounds for adjustment, when setting variable remuneration awards. 

Firm-wide policies and practices

The Discussion Paper raises the following areas for consideration in terms of firm-wide policies and practices:

D&I policies

The Regulators wish to explore requiring all firms to have a D&I policy and to publish it on their website, demonstrating their commitment and allowing stakeholders to hold firms to account. Without being prescriptive, these policies would need to include clear objectives, realistic goals, a plan for meeting those goals, and ways for measuring progress. 

Progressing diverse representation

The Regulators consider that future regulatory initiatives should have a focus on the diversity of senior management (since senior management is internally and externally visible and constitutes a wider population than the Board alone) and the progress firms are making. In support of this, the Regulators consider that a consistent definition of "senior management" across all firms would support benchmarking between peers. 

For large firms the Regulators consider that the definition of senior management should include the Board and the two leadership layers below the Board. This would normally include all SMF holders covered by SMCR. The Discussion Paper acknowledges that applying the same definition to smaller firms could be problematic and feedback on this issue is sought.

Developing diverse talent for the future

The Regulators consider that firms should think more about the progression of their employees, from their time of entry, to the top of the organisation. Firms should improve diversity at all levels of management - both in the shorter term when considering succession planning and in the medium term when thinking how diverse talent can progress up through the organization - and reflect on their approach to D&I in broader recruitment practices. The Discussion Paper does not, however, reflect upon the retention of diverse individuals, which is also a key factor to ensuring diversity at more senior levels. Whilst perhaps not a regulator’s role, the Discussion Paper also does not acknowledge a need for diverse talent from the entry points to the financial services sector (i.e. encouraging diverse school and university leavers).


In addition to their proposals for improving Board diversity, the Regulators are seeking views on the merits of setting requirements or expectations for firms to set targets for underrepresented groups for entry into the wider senior management, either qualitative or quantitative. Any such target setting would need to take account of the wider cultural context of the firm and firms would need to be able to explain the actions taken to meet any targets. Views are sought on these issues as well as whether such targets should be set by firms or by the Regulators and firms’ experience of targets for driving progress already put in place. 


The Discussion Paper seeks views on the kinds of training that are effective in promoting D&I and in helping understanding of the diverse needs of customers. The Regulators consider that training should be focused on real business outcomes, such as management recruitment, serving diverse customers, or funding small businesses with diverse leaders. 

Products and services that meet the needs of real customers

The Discussion Paper seeks views on the merits of developing expectations on product governance that specifically take into account consumers’ diverse needs, including protected characteristics and other diversity characteristics. 


The Discussion Paper seeks views on requirements for firms publicly to disclose a selection of aggregated diversity data on the firm’s senior management population and the employee population as a whole to enable benchmarking as to progress on D&I. Disclosures could include data on pay gaps (to include other characteristics in addition to gender), senior management and workforce diversity, and measures of inclusion taken from internal survey data. Again, proportionality is acknowledged as very important in this area.

The FCA will also be considering whether it should apply requirements similar to those proposed by NASDAQ for listed firms. NASDAQ is proposing to adopt new listing rules which would require all NASDAQ-listed companies to publicly disclose consistent, transparent diversity statistics regarding their board of directors. In addition, the rules would require most NASDAQ-listed companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self identifies as either an underrepresented minority or LGBTQ+.

D&I Audits

Firms are asked for their views on how internal audits can best assist firms to measure and monitor D&I. 

Regulatory measures

Fitness and propriety

The Regulators are exploring whether adverse findings in relation to individuals' conduct with respect to D&I issues could affect their assessment of whether or not a person is "fit and proper" to carry out their role. Guidance may be developed as to what constitutes non-financial misconduct and evidence of sexual harassment, bullying, and discrimination on the basis of someone's protected (or otherwise) characteristics may be treated as factors to take into account.

Firms would need to assess whether evidence of such behaviour constitutes a breach of the relevant conduct rules which would need to be disclosed in future regulatory references. The Regulators consider that guidance in this regard may be of assistance to ensure clarity and consistency and could have a significant impact on reducing non-financial misconduct and supporting inclusive cultures.

SMF approval

The Regulators are considering whether to collect diversity data about Senior Managers who do not sit on the Board as part of the information provided for SMF applications. The Regulators would like to understand more explicitly how firms have considered the proposed appointment and how it will support the collective suitability of the Board and senior management. The Regulators make clear that SMCR should not be considered a barrier to diversity of skills and experience among approved Senior Managers, disapproving of some firms anecdotally being tempted to adopt a “safe” option of replacing one Senior Manager with another from a similar background.

Conclusion and Next Steps

Many firms may have already adopted one or more of the proposals, particularly if they are large and/or subject to significant scrutiny from their stakeholders (for example, from investors in their products or other end-users). Signatories to voluntary codes such as the Women in Finance Charter will also have existing obligations. However, even if a firm has sophisticated D&I policies in place, it is likely that it will need to make adjustments once the proposals are finalised.

As a general matter, the proposals set out in the Discussion Paper focus on policies and arrangements surrounding the regulated firms themselves, rather than the underlying products of such firms. Individual firms may already have D&I measures in place in respect of their investments (or other products or services) – for example, asset managers may have environmental, social and corporate governance policies which integrate D&I issues in place in respect of their investment processes. The move to adopt such policies to date has generally been driven by investor expectations, rather than any regulatory initiative.  In addition, the proposals tend to focus on matters at Board and senior management level. This may be a reflection of needing to tackle a firm’s diversity and culture from the top-down to effect “deep cultural change”; but ultimately D&I issues will need to be integrated across an entire firm to be effective. In this regard the suggestion of introducing a publicly available D&I policy and reporting would be welcomed, although this would result in an increased compliance burden for firms themselves.

Whilst firms may most likely already be addressing D&I issues voluntarily at firm level, to date there has been limited dialogue with the Regulators on the issue. The Discussion Paper signals that D&I will increasingly become part of the engagement of regulators with firms in the financial sector. Accordingly, firms will need to prepare for reforms which will lead to more direct and detailed scrutiny of their D&I policies, practice, and delivery.

While the detail and timing of the introduction of regulatory changes will follow further consultation and industry input, stakeholders are invited to submit their responses to the Discussion Paper and its various consultation questions by 30 September 2021

Firms will want to keep a close eye on the development of these proposals, not least to ensure that they are able to adapt their existing and developing D&I initiatives to be able to comply speedily and effectively with the Regulators’ requirements as they are implemented.

Subscribe to Dechert Updates