Financial Services: D&I plans shelved to focus on NFM

In recent articles we have considered what to do when ‘off duty’ misconduct impacts work; the importance of fully investigating Non-Financial Misconduct (NFM) and the relevance of NFM to the financial sector’s assessment of the ‘fitness and propriety’ of its employees. In this update we look at the fate of the regulators’ proposals to embed a broader diversity and inclusion (D&I) framework in the sector.

Very recently (March 2025) the Financial Conduct Authority (FCA) issued an update on its proposals for diversity and inclusion (D&I) and non-financial misconduct (NFM).

In summary, initiatives related to D&I will not be progressed. The FCA/PRA’s focus on NFM will continue, taking care to align any regulatory developments with new legislation.

The proposals

In 2023, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) consulted in parallel on proposed rules and expectations aimed at improving diversity and inclusion in regulated firms. The consultation exercise’s key proposals included:

• the integration of non-financial misconduct considerations into the existing framework, including fitness and propriety assessments, and consideration of ‘suitability thresholds’;
• reporting requirements, including an annual D&I reporting obligation
• implementation of D&I strategies and a requirement to publish details
• A requirement to set targets to address underrepresentation at board, senior leadership and workforce level; and
• Recognition of lack of D&I as a specific non-financial risk

The consultation proposed to make a strategic, board-led approach to D&I a formal regulatory requirement for all large firms (with 250 or more employees) comprising, as a minimum; express D&I objectives with a plan for measuring progress; a summary of arrangements to identify and manage obstacles; and ensuring adequate knowledge and understanding of the strategy among staff. Firms covered by the PRA would also require a strategy to ‘promote diversity and inclusion on the board’, which, it was proposed, would go significantly further than the current requirement to have a ‘policy to promote board diversity’.

Data reporting was also a key part of the proposed framework, which included an obligation for larger firms to report annually on a broad range of diversity metrics and inclusion measures. As well as workforce demographics, the data reporting obligation also sought to address cultural issues, for example, whether employees feel safe to speak up where inappropriate behaviour is observed.

Perhaps most controversially, both regulators advocated D&I target setting in the financial services sector, to address underrepresentation at board level, senior leadership level, and amongst the employee population as a whole. Targets were to be disclosed publicly, with an annual progress report made to regulators.

Non-Financial Misconduct

In our previous article we discussed the FCA’s increased focus on NFM, and the regulator’s stance that allegations of NFM may have implications for an employee’s ‘fit and proper’ assessment, both for the purposes of annual certification and on an ongoing basis (Non-financial misconduct | HR Rely). We also looked at the circumstances in which NFM might breach the Conduct Rules.

The joint consultation had proposed to formalise and explain this, by revising the relevant sections of the FCA Handbook and the relevant PRA supervisory statements. It was proposed that the scope of the Conduct Rules should be expanded to cover serious instances of bullying, harassment and similar behaviour; and that guidance on suitability threshold conditions in the Conduct Rules should be amended to include, for example, sexual or racially motivated offences, or a finding of discriminatory practices, as matters that can be considered in assessing the suitability of a firm.

The way forward

In March 2025, both the FCA and PRA issues updates, by writing separate but aligned open letters to the relevant Treasury Select Committee.

On D&I, in light of feedback received, expected legislative developments and to avoid additional regulatory burdens on firms, the FCA and Prudential Regulation Authority (PRA) ‘have no plans to take the work further’. On NFM, the FCA wants to ensure their approach is proportionate and aligned with planned legislation, so they are ‘taking some further time to get this right’ and will set out next steps by the end of June 2025.

Separately, both the FCA and PRA letters to the Treasury Committee also say that the regulators will review the impact on gender pay inequality of removing the bonus cap, and that this work will likely begin in the 2026/27 financial year.

Comment

The PRA letter to the Treasury Select Committee potentially leaves the door open for future regulator-led action on D&I, stating that they ‘do not intend to return to this question until after the substantive implementation of any new legislation in this area’. While the FCA’s stated position appears similar, in that they ‘do not currently plan to publish new rules on diversity and inclusion’ the overall tone of this communication feels more ‘final’ and appears to cede to Parliament the role of formulating any binding equality rules in the foreseeable future.

Importantly, both regulators make clear that they will continue to support any voluntary D&I initiatives in the sector, and remains committed to improving corporate culture, in its broadest sense, across financial services. It is of course also crucial that firms also continue to meet their obligations under Equality Act 2010 to protect employees from discrimination and harassment on the grounds of ‘protected characteristics’ including gender, race and disability. While the regulators no longer plan to mandate a formal D&I strategy, it remains best practice to maintain a structured and reflective approach to workplace equality issues.

Many employers in the financial sector had hoped that revised and guidance from regulators would clarify the extent to which allegations of NFM are relevant to an employee’s professional/regulatory status and may be frustrated that this further steer is now ‘on pause’. However, this cautious approach feels sensible, to ensure that any rules changes are fully informed and workable.

The Employment Rights Bill (ERB), the Government’s flagship employment and equality legislation, is currently progressing through Parliament and contains a myriad of D&I and family-friendly measures. Separate legislation is planned on reporting ethnicity and disability pay gaps. While financial services regulators have understandably opted to step back from these issues, the D&I landscape is set to undergo important cross-sector changes in the coming months and years.

If you any questions or concerns about tackling Non-Financial Misconduct, or complying with diversity and inclusion requirements in your organisation, our HR Rely team of specialist employment advisors would be happy to advise you.

Read more below:

FCA Letter to Treasury: Letter from Sam Wood to Meg Hillier
PRA Letter to Treasury: Our letter to the Treasury Select Committee on the FCA's enforcement work and diversity & inclusion

If you would like to discuss how to potentially adapt your working practices or have any other employment related needs please feel free to reach out to Seema Champaneri directly at seema.champaneri@weightmans.com or find out more about HR Rely by clicking the following link to the Weightmans website.