FCA and PRA propose rules around misconduct to boost diversity and inclusion

The FCA and PRA have published a Consultation on new requirements that support diversity and inclusion by reinforcing action against non-financial misconduct and enhancing workplace culture.

05 October 2023 6 mins read
Profile picture of Kathryn Fallah By Kathryn Fallah

In brief:

  • The FCA and PRA published a Consultation Paper, setting out proposals for firmer misconduct rules in order to promote diversity and inclusion within financial organizations 
  • Financial regulators’ new proposals classify non-financial misconduct as misconduct for regulatory purposes and aim to equip organizations with defensive steps against offenders
  • These proposed rules push to amplify diverse perspectives and strengthen the industry through healthy workplace culture

The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) are taking measures to strengthen rules around non-financial misconduct, such as bullying and sexual harassment, to improve diversity and inclusion within the workplace.

On September 25, 2023, regulators published the Consultation entitled Diversity and inclusion in the financial sector – working together to drive change (CP23/20) in attempt to cultivate a more protected environment within the financial sector and ensure that firms can respond accordingly when handling non-financial misconduct. FCA Chief Executive Nikhil Rathi said:

“We have taken a lead among regulators in taking a clear stance that non-financial misconduct, such as sexual harassment, is misconduct for regulatory purposes. We’re strengthening our expectations on how the firms we regulate consider such misconduct when deciding whether someone is fit and proper to work within the industry.”

What these proposals mean

The Consultation further underscores regulators’ view that non-financial misconduct is included under misconduct as a whole, as opposed to being “an additional principle.” This indicates that non-financial misconduct can be just as damaging as actions like fraud or insider trading considering the influence it has on effective operations – the lack of a secure atmosphere causes ripples by affecting employees, which then impacts consumers and business performance overall.

In addition to supporting healthy work cultures, this move aims to promote productivity by “reducing groupthink” within organizations and encourage diversified perspectives. Overall, these points work together in “supporting the sector’s international competitiveness.” PRA Chief Executive Sam Woods stressed this point, saying:

“Diversity and inclusion play an important role in guarding against groupthink within firms. Firms in which a broad range of perspectives is welcomed and encouraged will manage their risks better, advancing the PRA’s objective of safety and soundness.”

The requirements introduced in this Consultation consist of a flexible set of minimum standards, including a diversity and inclusion strategy outlining organizations’ approach to meeting their goals; the collection, reporting, and disclosure of data against certain characteristics; and targets to handle under-representation. The focus on data collection will assist regulators in evaluating diversity and inclusion metrics within the industry and allow them to assess compliance more efficiently.

As well as this, the Consultation looks to bolster fitness and proprietary threshold conditions by explicitly including non-financial misconduct within the Conduct Rules and fit and proper assessments. Notably, and perhaps controversially, the FCA acknowledges that a person’s actions outside of the workplace should also be taken into account, noting:

“Similarly serious behaviour in a person’s personal or private life is also relevant.”

While it is vital that all businesses nurture culture, these rules will mainly apply to larger firms, defined by the FCA as having 251 or more employees.

Rathi stated that “flexibility is at the heart of the proposals,” which are purposefully broad so that firms can develop their own standards based on their business processes and environment. As proposals move forward to final stages, creating and enforcing policies around these strategies will become a main objective to embrace a culture of not only compliance, but integrity.

This proposal mirrors the FCA’s prioritization of culture speech released a few months prior, which underscores culture’s centrality to business performance. This speech also described the interconnected nature of culture and conduct, touching on the recent Consumer Duty rule release, which requires positive culture and transparency to foster success from a consumer perspective.

The attention on diversity and inclusion ties into regulation by influencing decision-making, combatting risk, and refining internal governance and processes, consequently affecting the industry altogether.

Frank Elderson, Member of the Executive Board of the European Central Bank, echoed the FCA’s posture on culture and its ability to dictate risk in a recent speech. He said:

“Supervising behavior and culture in banks is sometimes even more challenging than the traditional focus of banking supervisors – quantitative metrics, but it is all the more important that we rise to this challenge. Because while balance sheets are often scrutinized with a hawk’s eye, it is often culture that whispers the first signs of trouble.”

How to support healthy workplace culture

As regulators hone in on the severity of workplace misconduct, organizations can uphold culture within their workplace by properly surveilling business communications to enhance functionality.

By vetting and pinpointing misconduct occurring over communications channels, firms can address related issues as soon as possible. Not only can these measures catch inappropriate behavior, but they can examine business interactions as they happen to prevent situations from fully developing. Alongside data collection and reporting, monitoring conversations within the workplace further proves to regulators that businesses are being proactive and taking all necessary steps to diminish misbehavior.

The negative influence of misconduct on business is substantial and can affect workforce productivity, employee retention, and reputation. In a study conducted by Vault Platform in December 2021, workplace misconduct cost U.S. businesses $20 billion in a year.

Comments on the FCA and PRA’s proposed guidelines are welcome and will be taken into consideration to shape the final rules, which are planned to be released in 2024. The consultation period is open until December 18, 2023.

Fostering a healthy culture won’t just ensure a more operational workplace – it will ensure a healthy relationship with regulators as misconduct in every form becomes a focal point for upcoming rules.

Nurturing a healthy and supportive culture is imperative to business operations, and having tools to oversee workplace activity and handle misconduct helps. Our compliance solutions assist financial organizations with supervising and monitoring their business data to mitigate risk and comply with regulatory guidelines.