FCA Discussion Paper—Diversity, inclusion and its future impact on SMCR

FCA Discussion Paper—Diversity, inclusion and its future impact on SMCR

Blog WilmerHale W.I.R.E. UK

During July the FCA made two announcements which demonstrate its continued focus on culture and diversity and their intersection with governance. In a Consultation Paper, it announced proposed changes to Listing Rules which would require listed companies to disclose, in their annual financial report on ‘comply or explain’ basis, whether they meet specific board diversity targets. It also proposed a requirement that listed companies publish standardised data on the composition of their board and most senior level of executive management by gender and ethnic background.

In a Discussion Paper, published jointly on 7 July, the FCA and PRA set out a number of proposals aimed at accelerating the development of diversity and inclusion in the sector. The paper sets out the regulatory drivers for improved diversity, which include better decision-making and ensuring that the needs of a wider consumer group are being met.

The proposed areas discussed include:

  • the collection, reporting and monitoring of firms’ diversity data;
  • widening the use of targets, at senior management level and in customer-facing roles, to address the under-representation of minority groups directly;
  • linking remuneration to progress on diversity for senior managers;
  • public disclosure of diversity data and related policies; and
  • consideration of diversity and inclusion as part of internal audits.

The paper emphasises the importance of senior management creating a culture of diversity and inclusion, and identifies the Board as being responsible for setting the overall diversity strategy and overseeing progress. It also makes clear that ‘diversity of thought’ should be a “key consideration” in a firm’s strategy when recruiting members of senior management, to minimise the risk of groupthink.

The paper expresses how the regulatory expectations around the Senior Managers and Certification Regime (SMCR) may be impacted by developments in this area. Existing Prescribed Responsibilities relating to culture, typically held by the CEO and Chairperson of dual-regulated firms, could be extended to diversity and inclusion, to make senior leaders directly and personally accountable. Furthermore, the paper raises the issue of how adverse findings relating to diversity and inclusion issues could affect an assessment of an individual’s fitness and propriety and whether such ‘non-financial misconduct’ could fall within the Conduct Rules.

Commentary

Non-financial misconduct is increasingly an area of focus for the FCA and PRA and hence firms. This paper may lead to some long overdue clarity on the topic. It expressly acknowledges that firms would be assisted by guidance on what constitutes non-financial misconduct. It confirms that sexual harassment, bullying and discrimination would be “factors to take into account” for any fitness and propriety assessment. However, it also indicates that the anticipated guidance may extend to consider how “such behaviour, or failure to take reasonable steps to address these kinds of behaviour, could result in a breach of the Conduct Rules”, and accordingly oblige the firm to make a disclosure in any future regulatory reference. The wording underlined above is significant. Defining non-financial misconduct has proved challenging enough. A regulatory obligation to assess whether persons have taken reasonable steps to combat against and respond to such behaviour will not be easy. It may end up placing a significant burden on firms, as well as inducing some anxiety to managers.