D&I in Financial Services - FCA and PRA walk back diversity and inclusion rule reforms

The chiefs of the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have announced by letter that they are dropping plans to impose new rules targeted at improving diversity and inclusion in the financial services sector. 

We previously covered the regulators’ proposed reforms (see here) when the consultations were published in September 2023. The consultations proposed reforms that included requiring financial services firms to maintain an effective, publicly available D&I strategy aimed at promoting a diverse and inclusive culture, mandating that firms set diversity targets, and implementing additional D&I disclosure requirements for large firms. 

Now, in an effort to ‘boost growth’ in the UK, both the FCA and the PRA have decided against introducing these new rules. Nikhil Rathi, Chief Executive of the FCA, highlighted in his letter that the government is currently carrying out a ‘very active policy and legislative agenda’ which includes new legislation on a number of key D&I issues like gender action plans and pay gap reporting. Similarly, Sam Woods, the CEO of the PRA, noted in his letter that implementing the proposed reforms would lead to duplication and unnecessary costs for businesses. Both regulators plan to continue to support the government’s policy reforms and voluntary industry initiatives, but neither will take any formal regulatory steps forward in the area of diversity and inclusion at present. 

While the D&I reforms were the big-ticket items in both the FCA and PRA’s letters, there were also updates on other regulatory initiatives: non-financial misconduct (which was another topic of the 2023 consultation) and the bankers’ bonus cap. According to Mr Rathi, the FCA will take some additional time to plan out its next steps on non-financial misconduct, and the industry can expect an announcement of the FCA’s plan in late June 2025. 

In relation to the bankers’ bonus cap, both Mr Woods and Mr Rathi stated that regulators were committed to understanding how the removal of the bankers’ bonus cap, which was repealed in the UK in late 2023 (see here for our blog on the change), impacts gender pay inequality in the financial services sector. 

The change of heart on diversity and inclusion reforms may come as a surprise to many, and some may see a connection with developments outside the UK on the topic of diversity – for example, in the United States. While the proposals set out in 2023 did receive substantial attention and some criticism, they were detailed and multi-layered and signalled a serious focus from the regulators on promoting diversity and inclusion. 

Following the Treasury Select Committee’s Sexism in the City Inquiry in 2023/4 the FCA subsequently carried out an industry-wide survey of wholesale banks and insurers in 2024 to collect data on the volume and type of incidents of non-financial misconduct within firms. The results indicated there had been an increase in complaints and showed the difficulties in analysing the spread of issues and finding appropriate processes for dealing with them. Firms have therefore been keen to see the final proposals on non-financial misconduct. We must wait and see whether the regulatory view on non-financial misconduct changes. Whilst there are some broadly-related proposals being taken forward by Parliament in the Employment Rights Bill, they are not targeted specifically at the financial services sector. 

If you would like to discuss in further detail any of the points raised in this blog post, please get in touch with your usual Freshfields contact.