In September 2023, the FCA and the PRA launched consultation papers on their plans for an upgrade to the current regulatory framework addressing diversity and inclusion in the financial services sector. As well as focusing on non-financial misconduct, the FCA’s consultation paper (‘CP23/20: Diversity and inclusion in the financial sector – working together to drive change’) included proposals which will require large firms to report on diversity and inclusion data and put in place a strategy and targets for diversity. These proposals have since met with some criticism, notably by the Treasury Select Committee in its latest report on Sexism in the City.
Below, Jackie Thomas and Shiv Raja consider the key points covered in their recent ‘Foxed?’ podcast, which looks at the proposals around diversity and inclusion strategy and considers whether they may result in an increase in positive discrimination claims. The podcast is available to listen here.
- The regulators’ proposals on diversity and inclusion apply to large firms (as defined), and for firms of any size firms to which the CRR or Solvency II parts of the PRA Rulebook apply. These proposals cover D&I strategies, data reporting, disclosure, setting targets, and risk and governance and are intended to tackle the lack of diversity in the sector, with a view to “promoting healthy and inclusive workplace cultures, reducing the risk of groupthink, unlocking new talent and enabling greater understanding of the diverse needs of consumers”[i].
- The need for change is clear: for example, our research shows that in 2023 women held only nine per cent of CEO roles, with a rate of progress suggesting it will take 70 years for the gap to close. However, there are risks for firms in adopting measures to tackle underrepresentation. In particular, firms who seek to improve their diversity profile via recruitment could find that they have “positively discriminated” against other applicants. This amounts to direct discrimination under the Equality Act 2010.
- Positive action in recruitment, known as a “tie-break” provision, is lawful under s159 of the Equality Act in limited circumstances. Crucially, it requires the two candidates to be of equal merit for the post. The danger with the FCA’s proposals is that firms who have set targets for improving representation may feel pressured into recruiting candidates or promoting staff from under-represented group in order to show progress with their target. If that involves passing over a better qualified candidate, that individual could have a direct discrimination claim. An example of this is the case of Furlong v The Chief Constable of Cheshire Police[ii], where a white heterosexual male applicant was unsuccessful and succeeded in a direct discrimination claim.
- Reliance on the regulatory position will not provide firms with a defence to a discrimination claim. The regulators have been clear about this, confirming that firms must appoint the best person. However, they suggest firms must ensure that their recruitment processes produce a wide enough selection pool from which to make diverse appointments. This puts pressure on firms, particularly where there may in reality be a limited pool of candidates in the job market with the relevant under-represented characteristic.
- Overall, positive action in recruitment is likely to be a risky approach to improving diversity. Instead, firms should have a wider strategy which they embed within the business as a whole. This may include a reliance on s158 of the Equality Act instead. This section, in summary, allows general positive action to tackle relevant disadvantages (as identified in the section) provided such action is capable of objective justification. The Government’s Guidance on positive action in the workplace is a useful resource for employers wanting to consider practical steps. Examples include mentoring for ethnic minority employees, setting up networking groups and community outreach.
- Firms should only take these measures as part of a considered and structured approach to D&I strategy and the starting point should be the collation of evidence, for example via staff surveys, to highlight particular areas of disadvantage and consider what actions might be appropriate and, importantly, objectively justifiable.
- The proposals are not due to take effect until 2025. However, firms should consider their approach and start planning.
[i] FCA Consultation Paper, Chapter 5
[ii] Mr_M_Furlong_v_The_Chief_Constable_of_Cheshire_Police_2405577.18_judgment_and_reasons.pdf (publishing.service.gov.uk)
