FIA EPTA response to the Financial Conduct Authority Consultation Paper on Diversity and Inclusion in the Financial Sector - Working Together to Drive Change

18 December 2023

FIA EPTA members support the FCA's aims to improve diversity and inclusion in the financial sector; as it is an important component of creating sustainable financial markets. In addition, FIA EPTA members believe that supporting healthy work cultures, unlocking talent and creating an inclusive atmosphere within firms can further support the international competitiveness of the UK’s financial services sector.

However, FIA EPTA members primarily focus this response on ensuring that the D&I framework proposed by the FCA is productive for all types and sizes of firms that are active in financial markets. FIA EPTA members hope to ensure that the D&I framework proposed does not amount merely to a check-the-box exercise mandating data that does not improve D&I in the financial sector. FIA EPTA members would ask the FCA to ensure that any final proposal is carefully calibrated to reduce the likelihood of unintended consequences that may be detrimental to the FCA’s aims.

While we set out below a number of specific responses to the questions posed by the FCA in the CP, we note one overarching concern that we would wish to set out more generally. FIA EPTA members understand the initial rationale for the FCA setting the threshold for reporting at 251+ employees, as this aligns with the Companies Act 2006 definition of large companies. We note, in addition, that the specific disclosure and policies proposed by the FCA in the CP (1) require employees to provide certain information to their employer and (2) are intended to impact on firm’s hiring decisions over time. However, given how both of these two aspects of the proposal may operate in practice, we believe that the threshold proposed by the FCA is likely to be too low and risks unintended consequences that are potentially contrary to many of the aims of the CP. For these reasons (as we will explain in more detail here), FIA EPTA members suggest increasing the proportionality threshold for identifying a large firm from firms with over 250 employees to firms with over 1,000 employees.

As the FCA acknowledges in the CP, it is reasonable to assume that in any firm some proportion of staff will prefer not to provide such information to their employer. This can be for reasons entirely unrelated to a firm’s culture of inclusivity and can stem from employees’ personal, familial, and social considerations as well as their personal preferences and/or cultural norms relating to how much personal information they share with any third parties. An employee’s views can also be driven by the current political climate, in the UK or, for those who are not from the UK, in their country of origin. These considerations apply to all firms but have the potential to have a greater distorting effect on smaller firms’ diversity data. As the reporting will be done on a percentage basis, a smaller firm’s reported percentage demographics are influenced by a relatively small number of employees. For example, at a firm with 500 employees, if only 50 employees decline to share their ethnicity, there would be a 10% impact on the firm’s demographic statistics. This makes the data unreliable and potentially misleading when compared to other financial institutions with a larger number of employees. In response to the FCA’s specific questions, below we also discuss our concerns with the types of information and method of reporting that underscores the lack of reliability of the data, but these concerns are especially problematic for firms with fewer than 1,000 employees. UK financial institutions that have more than 1,000 employees would be far less impacted by employees who choose not to disclose their information and so their diversity information is likely to be less impacted by some staff choosing not to provide diversity data about themselves. We are particularly concerned with the public disclosure of data because we believe that the general public will not understand the inappropriateness of entity-to-entity comparisons.

The proposed proportionality threshold would mean that firms with fewer than 1,000 employees are disadvantaged upon external or FCA review of the reported data.

In addition, the disclosure and data collection requirements currently proposed by the FCA would be incredibly challenging for firms with fewer than 1,000 employees to meet. Many firms with more than 251 but fewer than 1,000 employees do not have the necessary systems, practices or personnel in place to thoughtfully deliver on the proposed reporting and strategy/target requirements, as many have relatively small HR functions, that already do very much with relatively few staff. On the other hand, firms with over 1,000 UK-based employees are typically large financial institutions already subject to the oversight of the Prudential Regulation Authority (PRA) and are also in some instances public companies or the subsidiaries of public companies and therefore are frequently already subject to certain other demographic and diversity reporting requirements. As such, firms with over 1,000 UK-based employees have a more public profile and are likely to have the necessary systems, practices, or personnel in place to deliver on the proposed requirements. Many FIA EPTA members are active in the D&I space and already have many D&I initiatives, such as affinity groups and inclusive workplace training. Many FIA EPTA members also invest significant resources into D&I-related recruitment efforts. These initiatives do not necessarily lend themselves well to quantitative analysis in the form proposed by the FCA.

Furthermore, having small
er firms comply with the proposed target-setting requirements will likely yield unintended results. Firstly, a firm with fewer than 1,000 UK employees has a limited ability to set demographic targets when turnover and hiring on a raw number basis is more limited. Consequently, requiring firms with fewer than 1,000 UK employees to create percentage targets based on protected characteristics may have the unintended impact of deterring D&I progress because such quantitative targets will be especially challenging for smaller firms to achieve and can have distorting effects both on hiring practices and on staff’s perception of the fairness of those practices. It is also likely that any such percentage targets will function more like illegal quotas. Indeed, rather than focusing on systematic changes that might promote D&I progress and encourage experimentation, the FCA’s proposed requirements will lead firms to settle for achievable quantitative targets and omit more impactful D&I goals for fear of disclosure. Additionally, public disclosure of such percentage targets may also be misunderstood and expose such firms to allegations of discriminatory hiring or promotion practices in violation of the Equality Act 2010.

For these reasons, and as set out below, the proposed disclosure requirements on firms with less than 1,000 UK employees are unreasonably burdensome and may have the unintended consequence of inadvertently hampering progress toward impactful D&I goals. Consequently, FIA EPTA members propose that the FCA adjust its proportionality threshold for identifying a large firm from 250 employees to 1,000 employees. This adjustment would relieve the significant burden on smaller firms that do not have the necessary data-gathering systems in place and increase the usefulness and comparability of the disclosures.

Separately, to create trust and cooperation among employees, the data exercise should meet the highest levels of GDPR. Many firms have a small number of members on their boards. We encourage the FCA to provide firms with the flexibility to combine “Board” and “Senior Manager” categories in instances where the firm is concerned with the privacy of board members.

We also encourage the FCA to take into account that some firms that are headquartered outside the UK, for example, US or European-headquartered financial institutions, will most likely have to comply with other jurisdictional and cultural differences. Below we discuss concerns with the target-setting and D&I strategy proposals specifically, but jurisdictional differences will also have unintended consequences. While financial institutions outside the UK would not be included in the proposals, oftentimes personnel decisions are made outside of the UK and those institutions could be subject to local legal risk for setting the proposed types of D&I strategies or targets. For example, a trading desk may have team members located in the UK and the US, under the same global manager. Setting hiring/promotion targets may impact the US members of the trading team, and expose the firm to the risk of US-related discrimination claims, particularly in light of the current environment in the US where “targets” are synonymous with “illegal quotas.” We urge the FCA to consider omitting targets, but in the alternative, utilise a more universally acceptable framework, such as “goals.”

  • EPTA
  • Sustainable Finance and ESG
  • UK