FCA D&I Standards for Large Firms Abandoned (for now), Non-financial Misconduct Rules Delayed (but Still Important)

In a previous alert, we discussed the proposals put forward by the UK Financial Conduct Authority (FCA) for all FCA-authorised firms to better integrate non-financial misconduct (NFM) considerations into their senior manager and certification regime (SMCR), including rules for staff fitness and propriety assessments, the FCA Conduct Rules and threshold conditions for firms.

Those proposals also included diversity and inclusion (D&I) requirements for firms with more than 250 staff members that are not classified as limited-scope SMCR firms that would compel these larger firms to, amongst other requirements, collect, report and disclose certain D&I data, establish, implement, and maintain a D&I strategy, and determine and set appropriate diversity targets.

Diversity & Inclusion

In its letter of 11 March 2005 to the Treasury Select Committee that was submitted with a similar letter from the Prudential Regulation Authority (PRA), the FCA stated that it has decided not to take its D&I proposals forward due to:

• The broad range of feedback received. This included the Treasury Select Committee itself which had strong reservations about the reporting aspects of the proposals.
• Expected legislative developments in the area, including on gender action plans and disability and ethnicity pay gap reporting.
• Wanting to avoid additional regulatory burdens on firms. In this respect, the PRA's letter noted that given the growing emphasis on reducing regulatory burdens on firms, adding significant new D&I requirements could be seen as conflicting with this approach.

Both the FCA and the PRA do not, therefore, intend to return to the issue until after the substantive implementation of any new general legislation in this area.

Both the FCA and PRA said that they will continue to support voluntary industry initiatives relating to D&I.

Non-Financial Misconduct

The FCA restated its commitment to tackle NFM but that it is important that its approach is proportionate and aligned with planned legislation. It noted that the legislative landscape has also changed since it consulted. It would, therefore, “take some further time to get this right” and will set out its next steps by the end of June this year.

Comment

As we noted in our previous alert, the FCA’s D&I proposals were not as wide ranging as some may have expected and would not apply to most of our clients in the private funds and fintech sectors.

While the FCA’s decision not to take forward its D&I proposals will relieve large firms of the affirmative burdens of reporting and a regulatory requirement to set diversity targets, duties connected with discrimination that exist under the current law and form part of all firm’s current obligations remain. Moreover, general law may still be introduced or amended that impose affirmative D&I duties on firms. The key point is that such duties will not apply by virtue of a firm’s regulatory status.

As to NFM and as we noted in our recent alert this remains a key priority for the FCA in the context of its ongoing focus on firm culture. As above, the FCA appears to be waiting for changes in the general law. In this respect, its concerns about proportionality make sense. If the general law is to address issues of NFM, then FCA rules should be limited to those necessary to supplement and enforce the general law and go no further.

Please reach out to your Goodwin contact or any of the contacts below should you want to discuss any of the matters raised in this briefing.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.