Summary of Consultation paper 18/23 of Prudential Regulation Authority (Diversity and inclusion in PRA-regulated firms)

Overview

This article provides a summary of the consultation paper (CP) from the Prudential Regulation Authority (PRA), which discusses proposed regulations and expectations targeted at enhancing inclusion and diversity in PRA-regulated firms. The objective is to enhance firm governance and decision-making, aligning with the PRA’s goals of safety and soundness and policyholder protection.

The proposed regulations expand on concepts covered in a joint discussion paper (DP)2/21 that the PRA, the FCA, and the Bank of England released in July 2021. Responses to DP2/21 showed that regulatory involvement in promoting diversity and inclusion in the financial sector is generally supported. These policies aim to take a holistic approach to promote diversity and inclusion, recognizing that this requires commitment throughout an organization.

Key proposed policy areas in the CP include:

Firm-wide strategies

The PRA proposes that Solvency II (SII) and Capital Requirement Regulation (CRR) firms with 251 or more UK employees should have a firm-wide strategy promoting diversity and inclusion. This strategy should encompass the firm’s core values, culture, objectives for enhancing diversity and inclusion, methods to measure progress, and the role of the firm and staff in creating an inclusive environment.

Targets

The PRA’s proposal includes setting diversity and inclusion targets for SII and CRR firms. These targets should encompass various demographic characteristics, including gender, ethnicity, and more, based on the firm’s context. The PRA expects firms to set realistic yet challenging targets, regularly review them, and provide a rationale for setting these goals.

Board Governance

The PRA proposes enhanced diversity and inclusion strategies for financial firms, emphasising diverse board composition, succession planning, transparency, and collective responsibility, with a focus on accountability and monitoring progress.

Individual accountability

The PRA suggests responsibility for diversity and inclusion would be allocated to relevant Senior Management Functions. Variable remuneration could be linked to non-financial performance metrics. Non-financial misconduct, like bullying or discrimination, may be considered in fitness and propriety assessments, impacting an individual’s ability to comply with conduct rules.

Monitoring diversity and inclusion

The PRA suggests a rule for CRR and SII firms to internally monitor diversity and inclusion based on evidence about their current profiles. The rule is designed with proportionality, ensuring even small firms monitor these aspects. Larger firms would have more specific requirements, aligning with proposed regulatory reporting.

Regulatory reporting

The PRA proposes that all CRR and SII firms with 251 or more UK employees, including third country branches, report the individual total number of UK employees. Firms with 250 or fewer UK employees are exempt from providing demographic, target and inclusion data but can voluntarily do so for benchmarking and publication.

The PRA proposes mandatory reporting of demographic data on age, sexual orientation, disability, ethnicity, religion, and either sex or gender. Voluntary reporting would cover parental and carer responsibilities, gender identity, and socio-economic background. Collecting this data can help identify barriers to inclusion, such as those faced by parents and carers, and promote diversity beyond gender and ethnicity. The PRA may consider making reporting on these characteristics mandatory in the future but recognizes the need for firms to adapt and employees to feel comfortable providing data. Data collection should comply with privacy and equality legislation, and firms should communicate their data usage to employees.

Disclosures

The PRA proposes mandatory disclosure of diversity and inclusion data for CRR and SII firms with 251+ UK employees. Disclosures should align with the regulatory reporting data, including sex, gender, ethnicity, board, senior leadership, and overall population. Disclosures must respect data protection laws and should be made electronically on a firm’s website, accompanying firm-wide and board strategies, targets, and progress updates. In the second year, following the effective date of the policy guidelines, the first mandatory disclosures should be made. In the first year, businesses can voluntarily disclose data. Disclosure formats should be flexible.

The PRA’s statutory obligations

The PRA believes that the measures’ impact on mutuals would be the same as those on other enterprises. Despite firms incurring various costs in ensuring compliance, the regulations are expected to bring benefits like reducing groupthink, promoting innovation, attracting and creating a wider talent pool and improving employee retention. The PRA provides average cost estimates per firm, differentiating between large and small firms based on their number of employees.

Conclusion

The PRA proposes strategies, targets, board governance, and individual accountability measures in an effort to improve diversity and inclusion in PRA-regulated enterprises. To encourage diversity in these financial institutions, mandatory reporting of demographic information and disclosures, together with a focus on privacy and equality regulations, is advised.

Publication: https://edu.bankofengland.co.uk/prudential-regulation/publication/2023/september/diversity-and-inclusion-in-pra-regulated-firms/